This past weekend, our country celebrated Independence Day, July 4th, commemorating our freedom and recognizing our status as an independent country. All over the country, this event was marked with parades, barbeques, and of course fireworks. I read in our local paper interviews with community residents who were commenting on their favorite traditions to celebrate this day.
That piece got me thinking about how traditions begin and how they are passed down from one generation to the next. Our culture places great importance on traditions and instilling them in our children. As I began to think about Independence Day, I wondered if we are placing enough importance on teaching our children financial independence so they too can one day celebrate the freedoms of not being burdened by debt or unfulfilling career choices. Here are several issues we should begin discussing with our children and grandchildren as early as their teenage years in an effort to help them build good habits and start down the path of becoming financially independent.
1) Living Within a Budget
A budget helps young people live within their means. A budget should have clear points of saving, spending, and charitable giving. The first ingredient in becoming financially independent is the premise of “Pay yourself first”. Teaching kids that their 401k, IRA, or Roth IRA contribution should be the first delegation they satisfy each month.
2) Debt Management
Another important lesson in financial independence is understanding how to manage debt. We need to help young people understand the difference between good debt and bad debt. Good debt such as mortgages and home equity lines provide means to acquire homes, make renovations, and other life necessities. They also provide tax benefits. Bad debt is letting consumer borrowing tools like credit cards, personal loans, or car loans get out of hand. A rule of thumb we have helped counsel our clients’ kids is that your debt service should not exceed 35%-40% of your net income.
3) Charitable Giving
Helping children understand the importance of giving to those in need and being able to support causes they believe in also teaches powerful life lessons. One of the best tools I have seen in this area is the use of 3 jars. As soon as kids can begin to work around the house for spending money, give them 3 jars. One jar is for spending, to help them understand that spending money is a result of hard work and that it is good to enjoy what you work for. The second jar is a save jar, to be used for the future or a special purpose. The last jar is to help the needy or a certain organization. The jars provide a tangible, visual way for kids to understand the idea of budgeting and setting aside money for different goals.
As the rest of summer will be filled with gatherings and family events, let’s take every opportunity to help our children and grandchildren build a foundation of financial independence so they can some day celebrate the freedom of being in a strong financial position.
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