We’ve all had a good chuckle seeing #adulting and #failuretolaunch on social media, describing the difficulty some millennials have adjusting to adulthood. But the numbers behind the hashtags aren’t funny. For the first time in 130 years, an 18-34-year-old is more likely to be living at home with his or her parents than to be living with a spouse or partner. Incredibly, 25% of adults aged 25-29 are still living at home.
Now, there are a lot of external economic factors and changes to the global workplace that can make finding work challenging for even the brightest college grad. There’s not a whole lot we parents can do about that. What we can do is make sure our kids aren’t suffering a #failuretolaunch because of financial illiteracy. No one is teaching your kids basic savings strategies, budgeting, or retirement planning in school. This is one of those areas where parents have to take it upon themselves to educate their children and help provide for their futures.
On today’s show, we speak both as parents and as financial professionals as we discuss some practical tips and strategies to educate your kids about their money.
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Insights from Today’s Podcast on How to Educate Your Kids About Their Money
Here are a few key points that I recommend discussing with your children, especially if they’ve just graduated from college and are starting their first real job:
1. Start early.
Maybe you’ve heard this one tossed out as a party game or a bar bet: Would you rather have $1 million, right now, or a penny that doubles every day for the next 30 days?
Most kids – and a lot of adults – grab the million. But do the math on that magic penny. On Day 2 you have two pennies. Day 3, four pennies. By Day 20, $5,242. Day 27, $671,000. And on Day 30, $5,368,000.
That’s the magic of compounding, and the sooner your kids get in the habit of saving money and putting that math to work for them, the better.
Assuming a hypothetical 10% return, a 22-year-old who saves $500 per month is working towards a $3.5 million nest egg when he or she retires at 65. Start that same savings plan at age 32, and he or she is looking at a lot less: $1.3 million.
$250, $100, $50 – whatever you child can afford to put away every month, educate him or her about the power of compounding, and the importance of sticking to a savings plan. And make sure you child takes full of advantage of any retirement opportunities his or her job offers, especially employer-match 401(k) accounts.
2. Understand volatility.
Why does the $500 per month example assume a 10% return? Because that’s the average ROI in the equity markets for the last one hundred years. A savings account is a good thing to have, but educate your children about how diversifying their assets via the stock and equity markets can lead to long-term wealth-building.
Volatility is a big part of that conversation, and the thing that scares off a lot of adults from investing, especially during rough patches. Instead, try to get your kids to think of low points as the market “being on sale.” When the market is low, you have the opportunity to buy more shares with that hypothetical $500 per month.
A lot of people can never clear this mental hurdle, and keep their money in more conservative investments that they consider “safer.” The 22-year-old who goes this route, and earns maybe 3% on $500 per month, ends up with $500,000 at age 65. That’s a $3 million difference compared to a sensible investment plan that diversifies and rebalances assets within agreed-upon parameters to reduce risk.
Remember: the long trajectory of the markets is upwards. Make sure your children know that dealing with volatility is just one part of an investment strategy that will create wealth in the long run.
3. Delay instant gratification.
Our consumer culture trains our kids to want – or in their minds, need – the newest phone, the coolest car, the biggest house, at the expense of any long-term planning. They want the million dollars in their hand, right now. They don’t want to hear about how the magic penny works.
I tried to educate my kids about the importance of saving and deferring gratification starting at a young age. Like a lot of parents, I insisted that half of any money they received as birthday or holiday presents went into savings accounts. I encouraged my kids to work part time as teenagers and take an active role in their finances by matching whatever they earned with deposits into a Roth IRA account. And while I do believe credit cards and building good credit is valuable, I’ve always stressed mindfulness about debt levels, and never carrying balances on high interest credit cards.
Getting help with tough conversations.
Trying to educate your child about delayed gratification and a retirement nest egg might not always make you the most popular parent. But the numbers speak for themselves. The longer a young adult waits to get serious about planning for his or her future, the harder #adulting will be.
If you’re having trouble communicating with your children about their financial future, your fiduciary advisor can be a great resource. A lot of our clients at Keen Wealth set up meetings here for their children, and we’re always happy to educate young adults about the importance of making a plan, and sticking to it.
For more insights on helping your kids transition into adulthood, I highly recommend Sen. Ben Sasse’s (entirely non-political) book “The Vanishing American Adult.” I’d love to discuss this book on a future podcast – maybe with the Senator on the line!
Bill Keen on How to Educate Your Kids About Their Money ...
“The sooner your kids get into the habit of saving every month, the better their long-term financial plan will be."
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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