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As a young man, I was taught the value of money by my father, and before I was in my mid-twenties, I had built up a fortune far beyond my age and that of my friends. So let me share the lessons I learned early on that have helped me be financially independent throughout my life.
I had to earn my allowance by doing chores around the house that were within my means. So teach your child that money has value and that it can be exchanged for something the child has to offer. Simple tasks like washing dishes, vacuuming, cleaning the car, mowing the lawn are all things a child can do to earn their weekly allowance. I was also quite entrepreneurial and grew a vegetable garden at home and sold the vegetables to my mother. I also built a chicken coop and sold the eggs to my mother and grandmother. You can also learn the value of bartering so that the child gets something in return for something. This is how he learns the value of his own achievement.
Encourage your child to save some of the pocket money they earn for major purchases in the future. I started saving money and making money max account at age 10 and found that I always had money in my savings account to buy things I wanted. My dad believed that if I saved some money, such as for a tape recorder (this was a few years ago), he would contribute the balance once I reached a certain amount. Help your child open a savings account at a bank today. Most banks offer special savings accounts for kids that are connected to the internet, so the child can go online and see his balance grow from month to month. It is also a good idea to teach your child that there is nothing wrong with talking about money and being proud of how their savings are growing.
I believe that setting savings goals at a young age, such as age 10, is a healthy way to see the money. I would recommend 2 savings accounts. In each of these accounts, you should deposit 10% of the money you earn during the week or month. Savings account #1 NEVER is only touched to use the money accumulated for further investments. This is an ideal way to make a down payment on a first home, for example. It should NOT be used to buy things with. Savings account #2, which is also fed by 10% of the income, is used to buy things that the child wants, such as iPods, CDs, skateboards, etc. It is a good idea to set a goal for the total amount of the two accounts. Once the goal is met, the child can take some money from account #2 and buy something special. Hang a chart behind the bedroom door and have your child record each month how the total amount of savings grows. Another incentive is that when the savings reach a certain amount, a parent puts, say, $20 into account #2 as a reward for reaching the goal.
One idea I used was to have a glass jar that I would throw all the coins into at the end of the day or week. Then at the end of the month, I would divide the coins in half, deposit half into account #2 and spend the other half.
This can be very technical for some people, but it is a very simple concept that is very powerful. Essentially, money plus interest plus time adds value.
To illustrate, $5 invested every week from age 6 to age 18 will yield approximately $5,330 at 8% interest after 12 years. In comparison, $10 invested from age 12 to age 18 will only grow to $4,120. In both examples, the same amount ($3,120) was invested, but in the second example, the child waited 6 years before starting to save.
Once your child reaches teenage years, it’s a good idea to help them create a budget and manage their spending that way. It just needs to be a simple budget with items for clothing, entertainment (movies, CDs, etc.), food and drink (eating out, candy, and cold drinks), and cell phones. Divide the 80% of the money earned that is available (remember 20% is saved) among the four categories and again have the child hang a spreadsheet behind the bedroom door and write in how much is spent in each category. This will be one of the best lessons to learn about money in these early years.
I would recommend that no child or young adult get a credit card until they are independent and have worked for a few years – around age 24 or 25. One or two maxed-out credit cards is one of the biggest problems facing young adults today. Most banks are guilty of this, as they are all too willing to extend credit to anyone. Rather, give your child a debit card around the age of 15 or 16, so they can experience the convenience of a plastic card but only spend the money they have budgeted out of the 80% of their income.
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