Top 10 Financial Concepts to Teach Our Kids Before They Leave Home

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By: David Gatchell, author The Financial Empowerment Handbook

Date: August 28,2024

As parents, preparing our children for the financial challenges they'll face as adults is one of the most valuable gifts we can give them. I learned much of this critical information from my parents growing up, the rest I learned from making my own mistakes later on, a lot of mistakes. Below are the top 10 recommendations that every parent should teach their kids before they turn 18 and before they leave home.

1. The Value of Earning Money

The first step to financial independence is understanding the value of earning money and how to do so. Whether through part-time jobs, internships, or entrepreneurial endeavors, kids should learn that money is earned through effort and time. Encourage them to start working early, even if it's just small jobs, to build a work ethic and understand the correlation between work and income. I always recommend young people to get a first job as soon as practical. At the same time introduce entrepreneurship as a viable alternative to a job.?

Take-away: Earning money through a job or business is work and takes effort - you have to earn it!

2. The Basics of Budgeting

Budgeting is the cornerstone of financial management. Teach your kids how to create a budget that tracks income, expenses, and savings. Start with your earnings (wages, allowances), subtract the costs for necessities (transportation, phone bill, clothing, etc), give a little something to charity, aim to save the rest.

Take-away: Spend less than you make!

3. The Importance of Saving

Saving is not just about putting money aside; it’s about building security for the future. Encourage your children to save a portion of every dollar they earn. Emphasize the concept of an emergency fund, which can protect them from financial crises. They should aim to save at least three to six months’ worth of living expenses so they can survive if there’s an emergency or if they lose their source of income. After filling their emergency fund they can start saving for specific short and long term future expenses. Once they’re saving, introduce the concept of net worth as a way to measure their progress.?

Take-away: Save first, then buy. Not buy now, pay later!

4. Understanding Credit and Debt

Credit can be a useful tool, but it can also lead to financial pitfalls if not managed properly. Teach your kids about credit scores, interest rates, and the dangers of high-interest debt like credit cards. They should understand the importance of borrowing within their means and paying off balances in full whenever possible. Emphasize using good debt to purchase something that will help you earn income or grow net worth and avoiding bad debt to purchase rapidly depreciating assets or consumables.

Take-away: Use credit responsibly to increase future opportunities

5. The Power of Compound Interest

One of the most critical financial concepts your kids should understand is compound interest. Explain how their money can grow exponentially over time when invested. The earlier they start saving and investing, the more they can benefit from compound interest, leading to significant wealth accumulation over the long term.

Take-away: Start now with saving and/or investing to have the maximum returns

6. Smart Spending Habits

Instill in your children the habit of mindful spending. Teach them to differentiate between needs and wants, and to be cautious of impulsive purchases. They should learn to prioritize spending on things that truly matter and bring lasting value, rather than fleeting pleasures.

Take-away: Be intentional with all purchasing!

7. Investing for the Future

Introduce your kids to the basics of investing. Explain the different types of investments, such as stocks, bonds, mutual funds, ETFs, and real estate, and the risks and rewards associated with each. Encourage them to start investing early, even if it's with small amounts, to build wealth over time and secure their financial future. Consider setting up a custodial brokerage account for them early on so they can get some earlier experience. Financial markets are for everyone, not just the rich.?

Take-away: Set up a brokerage account at 18 and buy your first stock or mutual fund ASAP!

8. The Importance of Financial Responsibility

Financial responsibility goes beyond managing money; it includes understanding the consequences of financial decisions. Teach your kids to be accountable for their financial actions, whether it’s sticking to a budget, paying bills on time, or making informed financial choices.?

Take-away: Financial responsibility now leads to financial freedom later!

9. The Role of Insurance

While often overlooked, insurance is a crucial part of financial planning and managing risk. Educate your kids on the importance of having the right insurance coverage, including health, auto, and renter's insurance. If they’re on their parent’s insurance plan now, at some point they will need to get their own coverage, and its important they do so. Explain how insurance protects them from unexpected financial losses and ensures their long-term security.

Take-away: Protect yourself from potential debilitating losses!

10. Planning for Retirement

It might seem far off, but it’s never too early to start planning for retirement. Teach your kids about retirement accounts like 401(k)s and IRAs, and the benefits of contributing to these accounts as soon as they start working. Always try to participate in employer sponsored retirement saving accounts, especially if the company matches your contributions (free money!). Understanding the significance of retirement planning early on can set them on a path to financial independence in their later years.?

Take-away: Plant the seed now that future retirement needs to be planned for!

Conclusion

By teaching our children these essential financial principles before they leave home, we’re equipping them with the tools they need to navigate the complexities of adult financial life confidently. If we as parents fail to do so responsibly, we’re leaving our kids’ impressionable minds open to whatever content they may find on Tik Tok or Instagram, much of it unbalanced at best, or to offerings at their high school, which may or may not offer anything to educate youth on financial literacy. If your state has a mandated financial literacy course for high school consider yourself lucky. If your student has a dedicated and qualified teacher on this topic, consider yourself even luckier.?

For parents who are actively introducing their kids to these concepts, keep up the good work. For parents who don’t yet know, or feel confident with the concepts themselves (we’ve all been there), education is key. Look for resources to increase your own financial literacy and then share with others. Or, read a book with your kids and learn together! My book, "The Financial Empowerment Handbook" provides further insights and practical advice that can help reinforce these lessons. Encourage your children to continue learning about personal finance, and remind them that financial empowerment is a lifelong journey.