Financial Advice I Gave My Kids
It is so important that kids learn about financial matters when they are young. Although we didn't have a formal plan, our kids took away a few important tidbits over the years. In this post, I’ll provide you with the 7 most repeated pieces of financial advice I gave my kids and 2 others I wish we’d given them. I grew up in a household in which good financial practices were demonstrated and occasionally discussed (as you can see in this guest post I wrote on how to help your kids become financially responsible adults). The biggest piece of advice I remember from my parents is to not buy anything for which I needed a loan. I’m fairly certain my parents had a mortgage, at least when I was young, but I'm not aware that they ever borrowed money to buy anything else.
With that history, my professional experience as an actuary, and my husband’s similarly diligent financial practices, our kids heard several messages repeatedly as they grew up, either because we told them specifically or they heard us as we made decisions or talked at the dinner table.
As you read the list, you might feel overwhelmed. Remember that my kids have been hearing these ideas for years. If they are new to you, focus on only one or two at first. Once you have those habits, then you can start adding more.
Financial Advice I Gave My Kids
Don’t sign anything you haven’t read or don’t understand
One of the fastest ways to commit yourself to something unintended is to sign a contract you haven’t read and understood. I read every word of every document I am required to sign and make sure I understand all of the terms. Some vendors may try to tell you what the contract says and encourage you to sign a document quickly. Don’t be intimidated; you have the right to read the document for yourself. If you don’t understand something or have a concern about some of the wording, you might want to consider having a more knowledgeable person or even a credentialed or licensed expert review the contract and explain it to you.
Don’t buy anything you can’t afford
Don’t ask yourself “Do I have to have this?” but rather “Is it in my budget?” and “Can I live without it?” Determining what you can or cannot afford is sometimes difficult. To help you with budgeting, I have written a series of posts that explain how to set financial goals,track your expenses, create a budget, refine and monitor it. As part of that series, I provided two spreadsheets – one for tracking your expenses to create your budget and another to monitor your expenses each month to see if you are on track.
One of the few things I remember from my Psychology 1 class in college is the concept of delay of gratification. In this context, delay of gratification means waiting to be able to afford something, such as after your student loans are fully paid, your salary increases or you’ve set aside money over a period of time, before you buy it. In fact, saving money over time for a big purchase is so important, I’ve dedicated a whole post to it.
Pay off your credit cards every month
This piece of advice becomes a lot easier if you have followed the previous piece of advice. It is very easy to charge more to your credit card than you can afford to pay in a single month, especially if you pool your expenses with your significant other, as both of you might charge “a little extra” in the same month making your credit cards bills hard to pay in full.
The costs of not paying the entire balance of your credit card can get very expensive as the interest compounds. My post on interest compounding provides a lot more details and examples. Not only do you have to pay for whatever you bought that you couldn’t really afford, but you will pay interest and possibly additional finance charges.
Also, credit cards tend to have some of the highest interest rates of any form of loan. If you can’t avoid borrowing money, look to a bank or credit union, among other choices. To learn about other ways to reduce your interest rate, check out my post on loans.
If your job is making you unhappy, stay at it until you find a better one
Having a job you love is a terrific goal, but the reality is that there will be days that you really dislike every job. While there is more to life than work, most of us unfortunately need to work to pay our bills. As such, I counsel my kids to not resign from their jobs because they are unhappy until they have been hired for a new job. However, if they are unhappy, I am the first person to encourage them to look and apply for new opportunities. In the past year, both of them have followed my advice (or maybe they were just smart enough to know what to do) and have found new jobs that they really like.
There are some situations that are abusive or physically dangerous, have other characteristics that make it unacceptable to stay employed. In one of those situations, I would support my kids if they resigned without having found a new job.
Always have cash for emergencies
Although the world is becoming increasingly electronic, some spare cash can be a lifesaver. At first, the stash might be $100 in $20 bills. As you are able to save more, it could increase. I keep mine in $100 bills because I always use $20 bills when I’m buying anything in cash so the $100 bills keep the emergency stash “special.” A few words of advice about the emergency stash.
First, remember where you put it. It wasn’t too long ago that one of my kids couldn’t find his/her emergency cash stash.
Second, don’t put it in a checked bag when you are traveling. Cash shows up on x-ray machines and you don’t want to advertise that it is away from your personal possession.
Third, make sure you know where it is at all times when you are traveling. I managed to lose a fairly significant emergency cash stash in Europe many years ago. Fortunately, we were visiting friends, were able to get more cash and didn’t have any emergencies.
In truth, I’ve never spent my emergency stash, so, other than losing it the one time, my stash is the original set of bills. Being an actuary, I think about adverse scenarios, usually involving emergency rooms in foreign countries or catastrophes that require me to need to leave an area quickly. Many of them would be eased by having cash.
Don’t insure anything you can afford to lose; buy as much liability limit as you can afford
This item may seem a little obtuse at first. For more details, check out the posts I’ve written on insurance (cars, homeowners, health, disability, vision and dental) and one that addresses these aspects of buying insurance specifically. Here are a couple of examples that you might be able to apply to your insurance buying.
Deductibles
One of the first questions I have been asked by young people about car insurance is the choice of deductible. The deductible applies when your car is damaged. Every time you cause an accident, you pay all repair costs for your car up to the amount of your deductible.
My advice above suggests, for example, if you can afford to pay $500 each time you have an accident but no more than that, then you should select a $500 deductible. Insurers not only include a provision for the average amount of losses they expect you to have each year in the premium charge, they also need to cover their expenses and make a profit. Therefore, if, on average, an insurer estimates that it will pay $150 more in losses each year if you have a $100 deductible than if you have a $500 deductible, your premium will increase by as much as $250 or more.
For our older cars, we don’t buy physical damage coverage. When we have new cars, we select the highest deductible available from our insurer of $1,000 because we can afford to pay $1,000 if we damage one of our cars.
Liability Limits
Another component of your car insurance is the liability limit. It is sometimes called the bodily injury limit. It is the amount that the insurer will pay to cover the costs of any injuries to other people in an accident you caused. Unfortunately, cars can cause very, very expensive injuries, especially if the injured person needs lifetime care. If your limit of liability doesn’t cover all of the injured person’s costs, the injured person can demand that you pay for any additional costs. To reduce the chance that the injured person’s costs exceed my limit of liability, I not only buy car and homeowners insurance but also umbrella insurance. Between the two, I have a very high limit (in excess of $2 million).
These examples and the deductibles and limits apply to my personal situation as someone who has saved a lot to cover the cost of retirement. When I was younger and didn’t have as much money, I had a lower deductible and a lower limit on my car insurance policy. My advice to my kids is to make sure that these aspects of their insurance policies stay up-to-date as their financial situations evolve.
Don’t focus on how much you save when you buy something on sale, but rather how much you spend
I always cringed when one of the kids came home and told me how much he/she saved by buying something on sale. Doesn’t it sound great to say you saved $20 or $100? The more important questions, though, are:
How much did you spend in order to save the $20?
Was that amount in your budget?
If not, was buying that item an absolute necessity?
If you know you are going to have to buy something soon and it goes on sale, it makes sense to buy it when it is on sale. However, it can be very expensive to “save” money buying things you don’t need especially if you can’t really afford them.
Advice I Wish I’d Given my Kids
There are a couple of pieces of advice that I should have given my kids, but didn’t.
Check your credit reports every year
Your credit report provides most of the information used by credit rating agencies to determine your credit score, as discussed in this post. It is important to check your credit reports with all three credit bureaus (Equifax, TransUnion and Experian). I know someone who once found that one of his father’s loans was on his credit report, as their names are similar. If he had tried to get a mortgage at that time, it would have been more difficult or he could have paid a higher interest rate because it looked like he had more debt than he actually had.
You can get your credit report for free once a year. I use https://www.annualcreditreport.com; although I am sure there are other options. (I note that I dig around that web site and print the paper form rather than put my social security number into the web site. Being the risk-averse actuary that I am, I have never entered my social security number into a web site.)
When considering investments, don’t buy it if you don’t understand it
Beyond the basic investment options available to you, such as certificates of deposit, investing-in-bonds, stocks, mutual funds, ETFs and the like, there is a very long list of investment options that are more complicated. These alternatives include financial instruments such as Bitcoin, CMOs, MBS, options, puts, calls and many, many more. In addition, there are non-financial alternatives, such as precious metals, real estate and fine art. Some of the non-financial alternatives are expensive to maintain and others have very volatile or limited markets for resale. As with not signing contracts I haven’t read and understood, I don’t buy investments I don’t fully understand.
Closing Thoughts
I hope at least one or two of these pieces of the financial advice I gave my kids are helpful to you. As I said at the beginning, if you aren't following any of this advice currently, you can start doing them one at a time!
