The pandemic highlighted the urgency of an issue we've known about for years — the vast majority of Americans live paycheck to paycheck with little to no funds to cover an emergency. While this is partially the result of stagnant wages and low minimum wage, many Americans simply have no idea how to save and invest for the future.
Just like children of the Depression internalized the frugal practices of their parents, kids of the coronavirus generation will likely have a different understanding of the value of money than other generations.
What should we be teaching them? Here are four lessons kids can learn in the wake of COVID-19 that will set them up for a strong financial future. But first, let’s take a look at how we can ensure our own financial peace.
How to Get Financial Peace
Given the market turmoil, which has hit portfolios and pensions, some are wondering: “Should I invest in safe haven assets?” Meanwhile, news reports indicate that many who received a $1,200 government check used that money to speculate in the markets - a highly risky endeavor.
Let's face it: Most of us could use strong encouragement and professional advice for our day-to-day finances and long-term investments.
Consider Dave Ramsey’s Financial Peace University. It’s a series of online courses, apps, and events. It’s available at little over $100 (a bargain) and even includes free 15-minute consultations with financial professionals.
Best of all, it helps you set up a plan, quickly get control of your money, so you can see progress. Getting a plan for our own finances will bring us peace and hope and it will help us teach our kids.
In addition, this month, Financial Peace University released a new course called Smart Money, Smart Kids: “Learn how to teach your kids to make wise financial decisions.”
#1: Don't Buy It Just Because You Can Afford It
Frugality is an important lesson, but teaching kids not to spend money just because they have it is vital to financial health.
Understanding the difference between a want and a need is crucial to financial security. When you make a list for the grocery store, let kids have an input. Talk about whether they need two different boxes of cereal or if it is a want, since you are also getting oatmeal and waffles.
Even if you have the money to purchase two boxes of cereals (which many families may not), that is money that could be saved, invested, or put towards debt.
#2: Have a (Very) Strong Emergency Fund
When we think of emergencies, what comes to mind? Losing a job, a medical issue, a burst pipe that floods the basement? When most people created an emergency fund, they didn't think "I'll need six months of living expenses due to a global pandemic that will put me out of work for up to a year."
Part of having a strong emergency fund is being prepared for the unexpected. Show kids how planning for the future, even an unexpected future, provides security. Explain how your emergency fund helped — or how it would have helped if you had a larger one.
#3: Understand the Magic of Compound Interest
Explaining how compound interest works will set your kids up for success. When anything grows over time on a percentage basis, it grows exponentially. The growth may seem minor at first, but the end results are spectacular.
Understanding this is counter-intuitive though. Even as adults we often think: What would it matter if I skipped eating out at restaurants or my Starbucks coffee or buying a new car?
The Magic Eye-Dropper
Sit down with your kids to watch this video of the “magic eye-dropper test.” Based on the work of mathematician Albert Bartlett, it shares a visual lesson in how compound growth works. The visual is based on a hypothetical situation. Here’s how the story goes.
Imagine you are in Yankee Stadium, and that the stadium is water-tight. It’s noon. You take the magic eye-dropper and leave a drop of water on the pitcher’s mound. Every minute this “magic” drop doubles. So one minute later, it’s two drops of water. A minute later it’s four drops of water. And so on.
Then you imagine that you’re sitting in one of the highest bleacher seats and you’re handcuffed to your seat. The question is: How long do you have to get out of your handcuffs before the stadium is filled with water?
The answer: Less than 1 hour. The stadium will be filled with water by 12:50 p.m.
With compound interest, what starts as seemingly slow (and boring) growth, eventually accelerates to remarkable growth.
A Stadium Filled With Chocolate
This handcuff/water scenario may be inappropriate for young children, so you could create your own story and make it fun by showing them how compound interest works with chocolate candies or another sweet. For example: one piece of chocolate is left on the pitcher’s mound. It’s magic chocolate that doubles every minute. You’re sitting at the top of the stadium. How long will it take for the stadium to be filled with chocolate and you can reach out your hand to grab as much chocolate as you want?
You could also ask: What would you do with all that chocolate if you had it? How long do you think it would last? A lifetime? And so on.
You could also explain how compound interest works by creating a spreadsheet that shows how much $100 would be worth in 10, 20, and 30 years.
Saving now, as kids, will give them an amazing advantage towards a secure financial future.
#4: Have Multiple Income Streams
More than 20 million Americans have lost their jobs so far in 2020. People who thought their jobs were recession-proof are finding out that those jobs aren't pandemic proof. To mitigate the risk of unemployment, encourage kids to have multiple streams of income — and model that in your own life.
For example, you might work a standard 9-5, flip figurines on eBay, and have a portfolio of stocks and bonds. When you aren't reliant on one sole income stream, you have the flexibility to earn income when things get tough.
Remember: Having options in life is having freedom.
Note: The key here is to be persistent. Success in any small business or freelance venture usually requires an ongoing number of tiny steps, taken without giving up. The ones who don’t expect immediate results, and who persist, will arrive at their destination.
Conclusion
The pandemic has changed everything. It also serves as an opportunity to teach our kids life-long lessons not just about saving, but about working towards a more secure financial future no matter what the world throws our way.
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