Five Rules for Financial Independence

Rule #1 — Never spend more than you have

Allocate a sum of money and let your children decide what they can buy and let them live with their decision.

Once they can identify a dollar note, allocate say $5 and let them choose their snacks for one week. Explain that they can choose to get one snack per day or choose just one fancy snack, but they will not get any more snacks than what they have bought for that week. Let them live with the decision.

Throw in some advice, like if they save some of the $5 then every so often they can have the daily snack plus the fancy snack; but that only happens if they save. Then, as the children get older, move it up to toys then clothes.

Be fair with them, give them what you would have spent and help them learn to make good choices.

Rule #2 — Learn to earn

At some point children need to learn that they have to earn to be able to spend.

Once they under stand the snack/clothes spending concept, reduce the money and assign jobs that benefit the family and pay them (a little more than the reduced amount) to do those jobs. Do not pay them for things that benefit them solely, like spreading their own bed or hauling their dirty clothes to the laundry room. Pay them for things that benefit the family, such as vacuuming common areas, washing and folding towels, washing the fruit and vegetables, cleaning the bathroom, washing the car, cutting the yard, doing the grocery shopping.

Again, be fair. You are preparing them to earn a real wage, so show them how certain jobs have greater value than others.

Rule #3 — Make an earning & spending plan

Involve your children in the family budget. Show them how money is earned and spent over a long–term period.

Show them how the money comes only at the end of putting in the hours, and how some of it is spent now for groceries and gas etc., and some of it must be put aside for later for insurance, clothes, car repairs, savings and emergencies. Show them the papers—the salary slips and the bills. Point out the taxes and the deductions for insurance and retirement, so they understand that not everything they earn comes to them, not now, not ever.

Notwithstanding, they must still plan and can come out ahead by earning more (Rule #2) and spending less (Rule #1).

Rule #4 — Understand interest

Learn how interest works, how it’s earned and when it’s paid, and the huge difference between the rate earned and the rate paid. Then, teach it to your children and find away to make them fear having to pay interest.

Basically, the compound interest model for savings is not feasible because a consistent compound rate of 5% has been a rarity in the last few decades in the US. It only works if you are never called upon to pay interest until you are well into the compounding period.

On the other hand, the very real minimum compound interest of 12+% on credit card balances will keep you in debt for decades. Earning 2% on $1,500 in savings while paying 15% on $1,500 in debt just doesn’t make sense. Mortgage interest is not far behind, at 5% for 30 years you will buy the house almost twice over before you are done paying for it.

Show them how to borrow less, how to save and plan for expenditures (Rule #3), and to repay all debt earlier than planned, so they pay as little interest as possible.

Save plenty, borrow little.

Spend the time now to prepare your children to be financially independent and thus safeguard your own future hard–earned financial nest egg.

Rule #5—Understand wants vs needs

This might be the hardest to get across, but worth the effort. Everyone under 21 years knows that life is very long, but only people over 45 years understand how truly short life really is. So, young people understandably tend to satisfy current wants at the expense of future needs because they have plenty of time to catch up; and then fifty happens, they do the money maths and panic.

A need is something that must be had whatever your age, whether you are working or not—shelter, food, and medical care to sustain life; or the government dictates you must have it (clothes, insurance, taxes).

A want is a nice to have (latest phone) to impress others (latest fashion), usually dictated by some entity earning a buck (who conned you to pay for wearing their name).

In between the two mileposts you will find things like savings, education, transportation, relaxation. Money should be prioritised along this continuum for the present as well as the future. So, teaching your children to identify needs versus wants, and how to balance providing for both, is vital for sound financial management.

Their involvement in planning for college (from as early as they start high school) is a good exercise for understanding these concepts—what are they willing to sacrifice and contribute now for ensuring their best future?

Conclusion

These five rules will provide a good foundation for dealing with the financial responsibilities anyone will encounter in life. Unfortunately, very little priority is given in formal education to these basic financial tenets.

So, as the person who will more than likely be the first point for future soft loans and temporary accommodation requests from your adult children, spend the time now to prep your children to be financially independent, and thus safeguard your own hard–earned financial nest egg.