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What Financial Advice Should I Give My Child?

by | Jun 10, 2019

Q: My children are getting older and one just graduated from high school. What is the best advice I can give them about money?

A: First off, congratulations to your child on graduating! This is a great question and a perfect time to explore some key financial concepts with your son or daughter. Below are some important tips to share:

1. Time is Money, So Start Investing Now

Well, it can be. One of the most powerful financial concepts is the power of compound interest, which involves saving and investing money, while allowing that money to “grow” over time. Time is something that, no matter how wealthy anyone is, you can’t get more of it. Therefore, it’s incredibly important to begin saving and investing at an early age to allow the power of compound interest to help carry the burden of building wealth.

Building wealth is like a snowball rolling down a hill. It’s hard to get it started and might seem like it’s not growing on its own for a while, but then, it starts to take off down the hill. Using its own momentum, it begins to grow rapidly. If you let it roll long enough without touching it, it could eventually become unstoppable.

Many people must start their financial snowball from scratch. At some point, usually the point we retire, we are forced to start taking snow from our snowball. The lesson, of course, is the earlier you start saving and investing, the bigger your snowball can become before you retire.

2. Don’t Obsess Over Cars

I love cars. I don’t know much about them, but I certainly do appreciate a nice, shiny car, loaded with features. But, as much as I like cars, I also hate how much they depreciate over time, especially new cars. In addition, many auto buyers must take out loans to purchase their vehicles, and their monthly payments are staggering. According to Experian, the average monthly loan payment was $523/month as of 2018, while the average auto loan balance was above $31,000.1

For a young worker, whose income may be low, every dollar saved is significant. This can allow for more opportunity to build an emergency fund, save for a down payment on a home, and help to not go into debt at an early age.

3. Don’t Become House Poor

While a car purchase is certainly a big decision, an even bigger decision is your child’s housing decision. Because, while bad spending habits on things like clothes, shoes, and entertainment can be quickly changed, things like cars and homes are usually long-term commitments.

Another key lesson regarding housing is how compound interest can work against you. This becomes relevant when discussing things like mortgages.

For example, explain to your child how much they would actually pay for a $250,000 house if they made a 20% down payment, took out a 30-year mortgage, and paid an interest rate of 4.5%? The answer is over $364,000.2

Making a larger down payment and reducing your term can significantly help decrease the amount of interest paid, but simply buying a house that is less expensive will lead to the biggest interest savings.

4. Choose Your Friends Wisely

Yes, this is not only good general advice, but is also good financial advice. Irresponsible friends will cost your child emotionally and financially. Bad friends will tend to influence your child to make poor decisions with their money, like lending to someone that won’t pay it back, or going on credit card shopping sprees.

The key is to not try and “keep up with the Jones’.” If their friends are buying fancy cars, big houses, a new pair of shoes every payday, encourage your child to not be influenced to do the same. Too often, we get distracted by the purchases that others make, but we have no idea what their balance sheets look like. I would imagine that in many cases, the more impressive the purchases, the more dismal the financial position. Nice things don’t necessarily equal financial success. Many times, they equal lots of debt and financial stress.

Surrounding yourself with financially responsible people is not only good advice for a young adult but is good for grown adults as well.

5. Shop Community Colleges and Be Glad Later

Community college may not sound as exciting as a big university, but financially speaking, it is much more attractive. Unless a four-year university can prove that it adds tangible and superior value in the first two years of their programs, the extra cost of attending such a university is just not worth it.

It’s also important to note that between 50-70% of college students will change their major at least once, and 50% of freshman are undecided on their major, according to Career Services at the University of La Verne.3 Why pay exponentially higher tuition costs for general education courses that are adding no specialized value to your child’s future?

6. Get Help on Choosing a Major

Lastly, encourage your child to get help choosing a major. Be sure they ask real professionals in their field of interest to get to know what it’s actually like working in that field. Tell them not to assume they know what the job will be like. Applying for internships or shadowing, even in high school, can be extremely beneficial in their decision-making process.

Also, they should think about what the job market could be like in that field once they graduate. How could technology impact jobs in that field? What will the return on investment be on their education? In other words, it’s probably not worth it to borrow $200,000 to obtain a degree that will secure a $50,000/year job. However, many students are unknowingly making these decisions all the time.

 

 

1 A $523 monthly payment is the new standard for car buyers. CNBC.com. https://www.cnbc.com/2018/05/31/a-523-monthly-payment-is-the-new-standard-for-car-buyers.html

2 Loan Calculator. Calculator.net. https://www.calculator.net/loan-calculator.html?cloanamount=200000&cloanterm=30&cloantermmonth=0&cinterestrate=4.5&ccompound=monthly&cpayback=month&x=115&y=12#amortized-result

3 How Many College Students Change Their Major? Reference.com. https://www.reference.com/education/many-college-students-change-major-e73c1e71ac0c0ed3

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