Last month, I took my 4-year-old daughter to our local bank to open her first savings account. Through her hard work helping us around the house, Addie had amassed a fortune of $12.44, which she enthusiastically handed to the bank teller as her first deposit. It was a proud moment for me as a dad, and for Addie, it was her first taste of financial decision-making.
It's vital that we as business leaders teach the next generation to be financially responsible. We are in a business world where sometimes the goal seems to be launching a startup to raise a bunch of money rather than creating companies with real value. Money is spent that people don't have, but if we can educate and empower the next generation to be responsible, it could save a lot of headaches and disappointment in their future.
A few years ago, researchers at the University of Cambridge observed the development of financial habits in children. The study found that by age 4, children understand that money can be exchanged for products. By age 6, they can determine whether they can afford something. And by age 7, children hold a strong enough understanding of how spending and saving work that they've already started to form their own financial habits.
That's right. Kids are starting to form lifelong financial habits by age 7. I didn't take my first formal class on personal finance until my senior year of college, which made me even more grateful that my parents started teaching me when I was young.
It's so important to start early. That's why my 4-year-old has a savings account. I want Addie to understand the value of a dollar. I want her to learn good habits and grow up to be successful on her own terms. I want her to learn how managing her money can not only bring some financial security, but also allow her to lead a more stress-free, autonomous lifestyle.
Here are five personal finance lessons I'm teaching my daughter:
1. Manage your own money.
There's no better way to learn than by doing. Many parents believe that they can teach children to manage their money by doing it for them -- but this just isn't true. Sure, children make mistakes when they're given the power to manage their own money, but you can't shield your kids from every possible mistake they could make. Plus, making mistakes on their own will be a more effective lesson than just hearing Mom or Dad say "no."
Kids who are always told "no" never actually learn to say it themselves. Learning to manage their own money will help children to be more independent and less reliant on others for financial assistance as they grow. What parent wouldn't want that?
2. Save your money.
If there's one lesson I learned from my parents, this is it. I remember my mom making me read a personal finance book by David Bach when I was in middle school, and that book, along with many others, helped me buy my first house at age 18. (Granted, I had to go to 33 banks or so to get a loan, but the knowledge my mom gave me through those books helped me get approved by that 34th bank.)
It's important to me that my daughter feel comfortable pursuing her passions, just as I did. Sometimes, a lack of money prevents people from following through with their dreams. Like any parent, I don't want my children to have to face that, but I also don't want to just hand out money as a solution. Teaching her to save money now is the best way to prepare for the future when her chance to follow her dream comes along.
3. Know the difference between a want and a need.
The study I mentioned earlier states that differentiating between wants and needs is one of the most difficult concepts for children to learn. (Try telling a 4-year-old that she doesn't need to watch "Moana" for the sixth time this week). But when it comes to managing money, it's one of the most important lessons they can learn. This goes back to what I mentioned earlier: learning to say "no" or at least "not right now." When kids can say "no" to some of the things they want, they'll be much better at assessing what things they really need and whether they can make those purchases.
4. Learn when to wait and when to act.
Of course, spending on a want isn't a bad thing, but I want to teach my daughter to plan her purchases. Before buying something she wants, I hope Addie will ask herself questions like: "Did I plan to buy this yesterday?" "Will I still want this tomorrow?" And, when applicable, "Would I still buy this if it weren't on sale?"
If she's answering "no" to any of those questions, that's probably a purchase to avoid, at least for now. These simple questions can help her save herself from impulsive and short-sighted financial decisions throughout her life.
5. Weigh opportunity costs.
If I were to add a fourth question to that purchase quiz, it would be "Is there anything better I could do with this money?" Many people make good decisions, but too few can consistently make the best decision when it comes to spending.
I want to teach my daughter to always think not just in terms of "yes" or "no," but to search for a third option. That could be finding a less expensive alternative, investing her money, or using her money to help someone who needs a hand. Whatever she does, I hope she'll weigh each opportunity and make the best decision.
My daughter is only 4 years old, but she is not too young to start learning many of the lessons I've outlined here. I hope that my guidance can have as great an impact on her as my parents' guidance did on me. Smart financial decisions will free her to live the life she wants to lead, and I can't wait to see where she ends up.