Marianela Collado On Teaching Kids About Savings and Investing
As a parent, you want the best for your children. Most likely, it means you want them to be safe and secure. And, you want to lay a foundation that they can build upon to do well in life. Speaking with your kids about financial topics, such as their money resources and choices, can help lay that foundation. It can also encourage them to form good financial habits while they are still young.
Our CEO Marianela Collado, CPA/PFS, CFP®, CDS® experienced this firsthand and is grateful that her mother would always tell her that “hours worked would be a waste if someone didn’t know how to save, even if it was just $5.” Marianela answered a few key questions on this topic to offer a foundation for important money talks with children.
At what age should someone start to learn about financial literacy?
These lessons happen early on. My kids are 10, 11, and 15 and they understand that they can’t get everything they want. You have to sacrifice one thing for another. When they get birthday money, it helps to talk to them about how much they should save versus use for current “wants”. Just to get in the habit of saving a portion of any monies they get. Kids understand brands of all the things they use such as Apple or Nike. Something to consider is opening up an investment account where you can buy fractional shares. Teach kids that they are investing in the companies that make the products they use and love every day. Teach them how to read the statements as well so that they are not intimidated as adults.
How much should someone put into checking vs. savings vs. investing?
The critical part of this question is understanding cash flow. Money in and money out. The first thing that needs to be carved out with HONESTY is the needs – housing, food, transportation, etc. When this is reviewed, careful attention needs to be given to affordability. How much is too much housing? Once this is backed out, we move to the next level. I don’t like clients to feel like they are being deprived but at the same time, they have to understand basic budgeting and planning. This exercise makes the difference between being able to reach financial freedom early or at all.
What’s the general rule of thumb for saving vs. spending from each paycheck?
You can’t just throw a blank % out there. This all depends on how much someone makes. It goes back to square one – understanding cash flow. As long as you are meeting all your needs and then you have to think about the impact of how much you decide to spend on wants versus save. The % to save will also depend on company sponsored plans. What’s the minimum you need to get the company match? Saving at least that would be smart.
Why is it important to save a portion of every paycheck no matter the amount?
The reason why saving from every paycheck is important is because it gives you the ability to prioritize your future self. PAY YOURSELF FIRST! If the contribution comes right off the top, it is out of sight out of mind versus the funds coming into our checking and then us having to do something to move it to a savings account. People never get around to it.
In what scenario is it not necessary to save a portion of your paycheck?
The only scenario where I would even think this be an option is for the ultra-wealthy. When you are at the stage where you’ve accumulated enough that you don’t need to save anymore to meet your future needs.