Imagine that your 18-year-old has a job, but due to some financial mismanagement, he has had to resort to a payday loan to get out of a pinch. You realize that you have to sit down and talk to him about different types of loans.
You first explain why payday loans are not a good way to borrow money and that a better way would have been to use a payday loan alternative. Perhaps, you explain, payday loans are a poor financial loan option because they not only carry a high financial fee but have to be paid back over a short period of time. Due to this pressure to come up with the repayment quickly, it’s easy to default. Meanwhile, quick installment loans are a better financial option because you can budget for your fixed repayment schedule to make sure that you pay it all back without defaulting.
However, let’s stretch this imaginary conversation back in time. Based on what you now know, what would you have taught your child as they were growing up? Here are some things children who are good with money are often taught by age:
Below 5 Years of Age
At this age, you have to teach kids to control their impulse to get everything they want the minute they want it. They have to learn to wait to buy something. The concept of delayed gratification is responsible for long-term thinking and planning in adults. It is the basis for all personal fortunes.
Between 6 to 10 Years of Age
By this time children have a basic understanding of money, and it’s now important for them to learn that money is a limited resource and that one has to make choices. Kid have to learn how to spend their money, where to allocate their limited funds. They have to learn how to make wise choices. Now is also a good time to introduce the ideas of goal-setting, filling up a savings jar, and learning how to spend and share wisely.
Between 11 to 15 Years of Age
By now, children should be ready to absorb the idea of savings over a long period of time. They should now learn that the sooner they build the saving habits, the more their money will accumulate. In addition, compound interest will accelerate how fast their money grows. Explain how compound interest is earning on their savings and on the past interest from those savings.
Now is also a good time to make a distinction between different types of savings. For example, there is short-term saving to buy a high-ticket item and there is long-term saving that continues to grow thanks to the magic of compound interest.
Beyond 16 Years of Age
By now they are ready to learn all the most important lessons about money, with their understanding deepening over the years as they graduate from high school and go on to college.
Here are 6 important financial lessons to learn:
- While savings is a good habit, an even better one is investing. One of the most powerful ways of investing is in education. Explain how the better educated you are, the more likely you are to earn a higher income. By choosing a reputable college and majoring in the right courses, you can set yourself up for a high-income career.
- Credit cards may feel like free money, but it is actually borrowed money. The best way to handle a credit card is to only buy what you need rather than expensive luxury items that you soon lose interest in. Only borrow as much as you can pay off completely at the end of each month. Misusing credit cards can result in a poor credit history, which makes purchasing big ticket items like a car or a home much more difficult in the future. In fact, it can even prevent you from getting a good job because employers are now using credit history as a way to select the right candidate.
- Avoid all get-rich-quick schemes. If something looks too good to be true, it often is. This is the fastest way to lose money. Even if the money-making scheme is legitimate, those who succeed are few in number, and usually it is only through sheer hard work and making expensive mistakes that they do well in any course, seminar, or method that teaches them how to make a lot of money quickly.
- Learn to love hard work. Nothing extraordinary has ever been achieved by people who are lazy. Sloth and indolence are the fastest ways to ruin your health, finances, and ability to overcome obstacles. Hard work is not just about physical effort, but about doing things well for the greatest benefit of all concerned.
- Learn to work smart. Hard work alone is not a magical formula, but if you combine it with the use of best practices and automation technology then you can leverage the benefits of hard work to create extraordinary results.
- Aspire to be in the top percentile of their field of interest. In any profession, 20% of those in that profession earn about 80% of all the money. What distinguishes those from the top from those at the bottom is knowledge and skills. With experience, knowledge and skills lead to mastery.
Although the best times to learn these lessons is when growing up, it’s never too late to teach your kids these lessons.
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