Hopefully you teach your kids good manners, positive values, and how to eat a healthy diet. But do you teach them about achieving financial security? Do you actually know what to tell them about money?
Recently I had the chance to sit down and interview Mike Zisa. Zisa is the author of the new book The Early Investor: How Teens & Young Adults Can Become Wealthy and is both a financial advisor and a teacher at Pennsbury High School in Bucks County, Pennsylvania. We talked about our college-bound kids and the importance — and rarity — of financial education in high schools. Zisa shared the most important lessons all high schools kids should know by the time they graduate.
1. Saving money is different from investing money. Saving is simply putting your money in accounts such as a savings, checking, or money-market account at a bank. It may also include cash investments such as short-term CDs (Certificate of Deposits). Having savings also means that your money is extremely safe and can be accessed quickly and easily. Investing, on the other hand, is the process of using your money to buy assets such as stocks, bonds, real estate, and other investments that should grow in value over a longer time period. Investing your money has historically been the better performer over one’s lifetime.
2. Embrace compound interest. One of the greatest mathematical discoveries of our time is compounding. Compounding is when your earnings from your savings and/or investments create additional earnings. In other words, compounding is when your earnings generate earnings. As a matter of fact, compounding makes your money grow exponentially! The younger you are, the more time you have for compounding to do its job.
3. Start investing early. This point is the one Zisa is most passionate about. It was his driving force for writing his book. The sooner you begin to invest your money, the more time you have to allow the effects of compounding to produce long-term wealth. Consider this: If you start investing $3,000 per year at a 6% annual growth rate at age 25, you will have approximately $680,000 by age 65. If you do not start until age 35, you will have about $260,000. Time has the most significant effect on generating long-term wealth. Start investing now.
4. Do not buy things you can’t afford. We live in a society that wants things and wants things now. There is nothing wrong with spending money that you have, but everything is wrong when you spend money you do not have. Spending money you don’t have leads to debt accumulation which can lead to financial disaster.
5. Use credit cards responsibly. Credit cards can be an important component of your financial life. Credit cards can also be the demise of your financial well-being. Many adults have used credit cards to purchase unnecessary and frivolous items only to put themselves in severe debt that can prove to be inescapable. When using a credit card, it is important to remember that you are borrowing money that you have to pay back. A few important things to remember when using a credit card:
- Pay off your entire balance by the due date
- If you don’t pay off the entire balance, you will charged extremely high interest rates
- Do not purchase items using a credit card unless you have the money to pay for them
- Beware of introductory interest rates and balance transfer offers
- Read the fine print of the credit card terms (the really small print they don’t want you to read)
6. Buy assets, not liabilities. Buy things that make you money, not things that make you owe money! For example, if you invest in a stock that pays a dividend (a portion of the profits that a company shares with you), you will receive cash every three months for doing absolutely nothing. If you purchase a bond, you will receive interest payments every six months. This is called passive income. Conversely, if you take out any kind of a loan to buy something, you now have accumulated debt that you will have to pay back with interest. Obviously, some loans may be necessary such as a mortgage when you purchase your 1st home, or maybe a car loan. However, other types of debt will increase your liabilities and hamper your ability to build wealth.
7. Establish a budget and save for a rainy day. A budget is simply an estimate of expected income and expenses for a given period in the future, usually monthly. By establishing a budget, you can monitor how much money you are spending on certain items and services. An important aspect of a budget is to set aside money each month to build a cash reserve, also known as an emergency fund. An emergency fund is money you have saved for the purpose of providing cash in case of an unforeseen event in your life. Ideally, you should have an emergency fund equal to three to six months of living expenses. Your emergency fund should be kept in safe, easy-to-access investments like certificate of deposits (CDs), money market accounts, or simply a savings account.
Zisa clearly believes that the path to financial security begins early. Like in all things, parents can teach financial literacy to their kids by being role models. If you live within your means, save, and invest your own kids will learn the habits needed to live a less stressful and more fulfilling life.