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 any 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 actuaryA professional who assesses and manages the risks of financial investments, insurance policies and other potentially risky ventures. Source: www.investopedia.com/terms/a/actuary.asp More, 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 budgetA plan showing targets for income and expenses over a fixed time period, such as a month or a year. More?” 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 budgetA plan showing targets for income and expenses over a fixed time period, such as a month or a year. More 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 interestA charge for borrowing money, most often based on a percentage of the amount owed. More compounds.  My post on interestA charge for borrowing money, most often based on a percentage of the amount owed. More 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 interestA charge for borrowing money, most often based on a percentage of the amount owed. More and possibly additional finance charges.

Also, credit cards tend to have some of the highest interestA charge for borrowing money, most often based on a percentage of the amount owed. More 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 rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More, 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 actuaryA professional who assesses and manages the risks of financial investments, insurance policies and other potentially risky ventures. Source: www.investopedia.com/terms/a/actuary.asp More, 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 deductibleThe amount that you pay before the insurer starts reimbursing you either in part (see coinsurance) or in full. Deductibles can apply per claim (as is usually the case for auto collision and homeowners... More. The deductibleThe amount that you pay before the insurer starts reimbursing you either in part (see coinsurance) or in full. Deductibles can apply per claim (as is usually the case for auto collision and homeowners... More 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 deductibleThe amount that you pay before the insurer starts reimbursing you either in part (see coinsurance) or in full. Deductibles can apply per claim (as is usually the case for auto collision and homeowners... More.

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 deductibleThe amount that you pay before the insurer starts reimbursing you either in part (see coinsurance) or in full. Deductibles can apply per claim (as is usually the case for auto collision and homeowners... More. 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 deductibleThe amount that you pay before the insurer starts reimbursing you either in part (see coinsurance) or in full. Deductibles can apply per claim (as is usually the case for auto collision and homeowners... More than if you have a $500 deductibleThe amount that you pay before the insurer starts reimbursing you either in part (see coinsurance) or in full. Deductibles can apply per claim (as is usually the case for auto collision and homeowners... More, your premium will increase by as much as $250 or more.

For our older cars, we don’t buy physical damage coverageAn insurance coverage that protects you when you cause damage to your own property, such as in a car accident, or without human cause, such as fire, hail, storm or earthquake. More.  When we have new cars, we select the highest deductibleThe amount that you pay before the insurer starts reimbursing you either in part (see coinsurance) or in full. Deductibles can apply per claim (as is usually the case for auto collision and homeowners... More 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 liabilityWhen used as a noun, the amount you owe to someone else.  When used as an adjective, an insurance coverage that protects you when you cause damage or injury to someone else or their property. More 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 liabilityWhen used as a noun, the amount you owe to someone else.  When used as an adjective, an insurance coverage that protects you when you cause damage or injury to someone else or their property. More 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 liabilityWhen used as a noun, the amount you owe to someone else.  When used as an adjective, an insurance coverage that protects you when you cause damage or injury to someone else or their property. More, 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 deductiblesThe amount that you pay before the insurer starts reimbursing you either in part (see coinsurance) or in full. Deductibles can apply per claim (as is usually the case for auto collision and homeowners... More 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 deductibleThe amount that you pay before the insurer starts reimbursing you either in part (see coinsurance) or in full. Deductibles can apply per claim (as is usually the case for auto collision and homeowners... More 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 budgetA plan showing targets for income and expenses over a fixed time period, such as a month or a year. More?
• 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 rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More 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 actuaryA professional who assesses and manages the risks of financial investments, insurance policies and other potentially risky ventures. Source: www.investopedia.com/terms/a/actuary.asp More 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!

Susie Q

Susie Q is a retired property-casualty actuaryA professional who assesses and manages the risks of financial investments, insurance policies and other potentially risky ventures. Source: www.investopedia.com/terms/a/actuary.asp More and mother of two adult children.  As her children were moving from their teens into their 20s, she found she was frequently a resource on many, many financial decisions and she had insights and information she could provide to them on a wide array of financial decisions.  She spent a significant portion of my career building statistical models of all of the financial risks of an insurance company and interpreting their findings to help senior management make better financial decisions.  She is the primary author at Financial IQ by Susie Q and volunteers with other organizations related to financial education.