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5 Rules to Teach Your Kids about Money

Get Your Kids Started Right with these Five Rules of Money and Investing

I’ll admit, the idea for this post was money rules to teach your kids but I realized while outlining that these are really the biggest things we ALL need to learn about money.

Many of these lessons, I had to learn the hard way. Others I learned second-hand from others that made a big money mistake and shared the rule they learned.

I didn’t want to make this a generic ‘Rules about Money’ article though because it misses an opportunity that I think is too often missed. It would miss the opportunity to teach kids about money at an early age, before they have to learn the same lessons we learned…costing them all the emotional scars and empty bank accounts that those lessons cost.

So as you read through and think of how these rules apply to your own finances, bring your kids into the conversation. Share with them the money lessons you’ve learned and how these rules might apply to their life and goals.

What Kids Need to Know about Money – The Important Stuff

We so often get caught up in the details about money that it’s easy to forget the big, important ideas. As a result, most kids grow up never even learning these two rules about money.

The first rule of money is it doesn’t matter how much you make if you’re not happy making it.

Now I could drop all kinds of clichés in your lap. Sayings made popular by Steve Jobs like, “The only way to do great work is to love what you do,” and memes like, “Love what you do and you’ll never work another day in your life.”

I used to hate hearing that. It sounds like something a billionaire would say. Something that sounds great but isn’t rooted in the real world.

Most of us are confined to the reality of working in a job we DON’T love but doing it because it makes money and we need money to pay the bills.

But the truth is, all those billionaire philosophers are right! You can be happy and make money at the same time. In fact, I’d say if you’re not happy in your job…it doesn’t matter how much you make. You need a different job!

Americans spend an average of 90,000 hours of their lifetime at work. That’s 11,250 days…roughly 43 years if you don’t count weekends and holidays.

Life is to short to spend almost half of it miserable!

So even if it means making a little less, even if it means trying as many jobs as possible, do everything you can to find a job you enjoy doing.

The second rule of money is that your THINGS won’t fix character flaws or make up for that gaping hole in your self-confidence.

We’re all trying to keep up with the Joneses. We buy the most expensive SUV and the biggest house we can afford. We absolutely MUST have the most amazing kitchen with double-ovens and premium cabinets.

For most, it’s a desperate attempt at impressing others. A plea to, “Look at me. Look at how successful I must be.”

Not only is it a never-ending hamster wheel of debt and material competition, but it will never REALLY make you the person you think it does.

I should know. After having some not-so-modest success in real estate at the age of 23, I rushed out to buy the car of my dreams…a cherry-red, Porsche Boxster convertible. It was brand new, a 2003 model and it was beautiful.

And it also cost me $40,0000! (Incidentally, you can’t drive around in a Porsche without some bling on your wrist so I bought a $6,000 Rolex to go along with it).

The very expensive lesson I learned though is that car didn’t really make me feel any better about myself. It didn’t make me any more successful, handsome, charming or admired. It just attracted the kind of people that thought that kind of thing was important…other shallow people with self-confidence problems.

Now this doesn’t mean you can’t have nice things. Just don’t think those ‘nice things’ define you and there’s a HUGE difference between nice things and ridiculously over-priced things that are more status-symbol than why you really need them.

How to Teach Your Kids about Investing

As an investment analyst of more than a decade, most of my experience with money has been from the perspective of the investor. As important as investing has been in my life though, I would say 99% of it can be boiled down to three simple rules.

Rule #1 of Investing – It’s what you put in

This sounds totally counter-intuitive. After all, you’re investing your money to make a return and make more money. The problem is that people think they can save up a few hundred dollars, find some hot penny stocks and retire millionaires by the end of the week.

Real investing just doesn’t work that way!

To give you an idea, if you invested about $500 a month, you would need a return of 70% every year to reach that million-dollar portfolio in a decade! That’s more than most people can afford to invest and a hugely unrealistic return (Netflix, the hottest stock of the last decade, only grew by 45% a year).

Real investing in a portfolio of stocks, bonds and real estate that will protect you from the big stock crashes but get you to your magic number…that kind of investing is going to earn you about 7% annually. That’s not a bad return, actually it’s pretty darn great, but it’s not going to turn a thousand into millions and it’s not going to do it overnight.

At an annual return of 7%, you either need to invest $1,000 a month for 29 years or $100 a month for 61 years. That’s still a long time but a lot more realistic.

Teach Kids Investing
Teach Kids Investing

But increase your savings to $1,500 a month and you’ll get to your million-dollar payday within 17 years.

You see, it’s much more realistic to think you can increase the amount you save and invest each month than it is to think you’ll be able to find those huge double-digit returns that have eluded everyone else. Going after this modest, more realistic return is also going to keep you from chasing the riskiest stocks that may only lose your money in the long-run.

Investing Rule #2 is there is No Return without Risk

Working with regular investors through the blog and YouTube channel, I’m amazed at how quickly investors run to high-risk investments like penny stocks and bitcoin. They see the potential for twenty- and thirty-percent returns and think they’ve cracked the code.

They think nothing about the risk involved in these investments.

Most investments work in a market-environment. That means there are thousands, if not millions of investors watching the prices and buying or selling for a return. A natural effect of this market trading is that prices and potential returns tend to reflect the amount of risk in an investment.

Investors aren’t going to pay much and are going to demand a much higher potential return if a particular investment has a high level of risk that the price will go down further or even drop to zero.

That’s what you’re getting in all these penny stocks, bitcoin and any stock that has lost a good amount of its value over a short time. The risk that these will keep dropping is overwhelming.

Don’t think you’re getting a free ride; a high return with no risk. Unless you’ve found a crystal ball and see something nobody else sees (believe me, both of these ideas are about as likely as seeing a unicorn), then that stock with the HUGE upside return also has an even bigger risk that the price will go the wrong way.

Investing Rule #3 is to Start with Your Goals and Invest from There

What’s the point of investing if you don’t know WHY you’re investing? Yeah sure, most people are investing for retirement…but they have absolutely no idea what that means. Now it’s ok to invest to have money for retirement but if you don’t know what retirement actually looks like to you, you’re on a road with no destination.

Thinking about your goals and building an investing plan around that is going to accomplish two things. First, it gives you an idea of how much money you’ll need and so how much you’ll need to invest. It also motivates you to keep saving and investing.

How motivating is it to say you’re, ‘investing for retirement?’ Not that motivating. In fact, rather than save for the next 30 years, you’ll probably stop several times and may even take money out for that big vacation.

On the other hand, how much more motivating is it to say, “I’m investing to take an around-the-world cruise when I turn 65?” You’ve got a picture in your head, a story of all the places you’ll see and people you’ll meet. That mental picture is going to motivate you to save and invest for as long as it takes!

So these five rules of money and investing aren’t necessarily something only kids can learn from. The sooner you teach them to your kids though, the happier they’ll be and the fewer mistakes they’ll make. I think I could have just as easily titled this post, “The Five Biggest Money Mistakes Most People Make” but I would have missed out on a great opportunity. Even if you’re still trying to learn these lessons, these rules of money, teach them to your kids and get them started on the right foot!

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