Personal Finance - What You Need to Teach Your Kids Today
Personal_Finance / Educating Children Dec 01, 2013 - 01:04 PM GMTBy: Investment_U
David Fessler writes: Today is Black Friday, Americans’ annual homage to our greatest passion: shopping. And I’m not looking to spoil your fun. But before you hit the stores, I want to skip my typical commentary on the energy sector and talk about how to model good financial habits for your kids.
Because it breaks my heart that so few parents give their children the gift of financial wisdom. According to CNBC, most parents over age 50 have never discussed investing with their children. Are you one of them?
At the very least, you need to warn them – beginning at an early age and continuing through their young adulthood – about the biggest mistakes that most people make with their money. To do that, you need to know what those are.
A Bad State of Affairs
CNBC quoted studies that show “half of Americans age 18 to 34 couldn’t come up with $2,000 for an emergency, and only 14.6% of college students with credit cards know their interest rate.”
Our schools are far worse. Few states have even basic personal finance as part of their curriculums. A soon-to-be-published study of 201 financial literacy education programs found them to be essentially worthless.
It’s even more important today to educate children about finances and investing. The financial environment facing consumers today is far more dangerous than the one our parents faced.
Exotic mortgages, easy credit, debt consolidation loans and payday loans are a few examples. It’s no wonder there’s been a fivefold increase in bankruptcies in the last 30 years.
The good news is personal finance isn’t very hard. It starts with avoiding the big blunders.
What Not to Do
Here are the four most-common mistakes people make when managing their money.
1. Doing nothing. Not learning how to manage money early will cost your kids hundreds of thousands of dollars over their lives. Here’s what they need to know:
•Start investing as soon as they have a job. Otherwise, they’ll miss years of compounding interest.
•Keep a budget. Spend what is left after saving instead of saving what’s left after spending.
•Pay off credit cards every month. Some of them carry interest rates as high as 28%.
•Pay bills on time or early. Otherwise, you can damage your credit score and rack up late fees.
•Gradually build a rainy day fund equal to six months’ expenses. You never know when a personal emergency might occur.
2. Failing to diversify. When I was a vice president at a major semiconductor equipment manufacturer, I had most of my investments in that company’s stock.
At the height of the dot-com boom, its shares hit their all-time highs. I decided to sell and diversify. It turned out to be a timely decision. Shortly thereafter, the tech bubble burst, and my company’s shares dropped like a stone.
Smart investors have well-diversified portfolios and rebalance them annually.
The Oxford Club’s diversification model is pretty straightforward: We recommend 60% in stocks, 20% in bonds, 10% in Treasurys, 5% in precious metals and 5% in real estate investment trusts.
3. Paying more taxes than you have to. Simple tools for tax-advantaging your wealth, including 401(k)s and IRAs, are well-known. Yet most people don’t take advantage of them to the extent that they can. I’ll have more to say next week on the tax rules that apply to these retirement vehicles. But for now I’ll say: If you’re not yet retired and you aren’t investing in a 401(k) and/or IRA as much as you’re allowed to under the law, you’re giving too much money to the feds.
But 401(k)s and IRAs are just the beginning of what you can do to reduce your tax burden. In fact, next Tuesday, the Oxford Club is hosting a free webinar with some of the country’s leading experts on tax mitigation. You’re invited. They’ll be discussing some sophisticated, effective and completely legal techniques for keeping more of your own money. For more information, click here.
4. Going into debt. The first thing many young adults do when they land their first job is buy a car. Since few of them have enough money in the bank to write a check for one, they take out a car loan. Marriage follows, and young couples often find themselves straddled with two car payments and a mortgage. Many will live their entire lives in financial bondage.
But it need not be that way. Talk to your kids early and often about how to avoid financial traps and build wealth over time. Is there any better time to do it than today – say, while sitting in mall traffic?
Good investing,
David Fessler
Source: http://www.investmentu.com/2013/November/black-friday-what-you-need-to-tell-your-kids.html
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