Personal Finance Guide for Kids Age-by-Age

Teaching Children about Money: Goals by Age

First Published Date : August 22, 2010 ADawnJournal.com

Did you know anything about personal finance when you were a kid? I did not, and I hadn’t the slightest idea of how money and finances worked at that time. I wish things were different then. I wish I was taught to prepare myself to face the real world financially. It’s not just me; most of us were not given any money lessons at an early age and at schools and universities. It is time to take lessons from our past. As parents, our goals should be to financially prepare our kids to face the money challenges that exist in the present world. Today, I will present a simple age-by-age personal finance guide for kids. To make things simple, I have broken down the learning time frame into 4 different parts: age 1 to 5, 5 to 10, 10 to 15, and 15 and beyond.

Personal Finance Guide For Kids: Age Up To 5

Kids start to show interest in money and coins at an early age. During this time frame, start teaching kids the basic concepts of money. Here are some ideas:

Introduce them to various coins and bills.

Teach them how different coins and bills add up to a greater bills and coins. For example, 5 pennies make a nickel, 5 Loonies (1 dollar coin) make a 5 dollar bill and so on.

Explain how money and society work. Money is something that we exchange to buy various products and services to take care of ourselves.

Teach where money comes from. We go to work to earn money and this makes us sacrifice our time at home with family.

Buy them a piggy bank and encourage them to save money by putting money in it whenever they have some in their hands.

Personal Finance Guide for Kids: Age 5 to 10

Explain that money is not endless. We need to make choices between products or toys; we can’t have it all, as money is not endless. If your kids ask for many things at a time, an exercise you can do is to give them an amount, such as $5 or $10, and tell them to pick the one they think would be the best.

Tell them we need money to buy food and take care of ourselves. We can’t spend all money as soon as we get it because if we do that, we will be in trouble in the future and won’t have anything to take care of ourselves.

Involve kids in family planning and finances. Ask your kids to participate actively in family meetings regarding future planning and money issues. For example, if you are going on a vacation, ask your kids to research the best deals within your budget or ask everyone, including the kids, for their suggestions on fulfilling goals of making major purchases and so on.

Do not give kids allowance without proper guidance. Help them to budget their allowances, especially a certain percentage (15 to 20%) going to their savings accounts.

Teach them how to pay for a purchase and how to count the change they are getting back from the cashier.

Teach kids the power of giving. Tell them that we are fortunate to live in one of the wealthiest countries on earth and not everyone is as fortunate as we are. Explain to them that we can live a more meaningful and joyous life by sharing and giving what we have to those who are less fortunate.

Explain how a bank works, what a credit card is and why it charges interest. 

Explain to them what a budget is and why it is important to stay within a budget. However, do not over-emphasize the budget at this time.

Personal Finance Guide for Kids: Age 10 to 15

It is time to put some concepts you taught your kids in the previous age segment into practice at this time.

Set up a real savings account at the bank. Teach your kids how to handle bank accounts. Teach them about credit cards and how they work. You can also set up a credit card for them with a lower limit. Here is an article to deal with credit cards for kids: Should We Give Credit Cards to Kids?

Help your kids with setting goals. Explain to them how to set up goals and show them how to reach goals by making plans. For example, if they want to buy a bicycle or a gadget, instead of financing the full cost ask them to finance half from their savings by setting up goals to save that much.

Kids should pay for their expenses such as movie tickets, cell phone bills, snacks, etc. themselves. The reason? Using their allowances to pay for stuff they need will make them realize that money is limited and if they waste money on something, they won’t have money to buy other things.

Ask them to exercise the power of giving. Even from their small allowance, they can donate to charities and to those who are less fortunate.

Kids should budget for their expenses at this point and should spend less than their earnings or allowances.

Kids should not be paid for doing regular household chores. However, you can pay them for special projects which are outside regular chores such as such mowing the lawn, cleaning the backyard, and so on.

Personal Finance Guide for Kids: Age 15 and Beyond

This is the most critical time of kids’ lives as they are on the verge of stepping a foot into the real world. Personal finance education should follow a slightly different path at this stage.

Start talking about more targeted personal finance teachings starting this point. Some of the examples are: Investing 101, debt management, credit cards, how financial markets and products work (Invest Now by A. Dawn is a recommended book to learn the basics of financial markets and products), and so on.

Some of the resources you can use for your kids can be found right here, written by your favourite personal finance author A. Dawn. The Personal Finance For Kids Section is just one to mention among a few of them here. There are tons more articles suitable for kids available for free on A Dawn Journal. Take your time to read them to enhance your knowledge on personal finance at your leisure by bookmarking this page.

Just because your kids have reached this age does not mean that you should stop talking about finances. Kids at this age need more financial advice and guidance than ever before. Have open discussions about money and finances whenever opportunity exists.

I have taken my time to write this article suitable “in general” for all kids. These guidelines or tips are not set in stone. It is recommended that, based your kids’ ability or interest, you may need to switch around these tips. For example, if you find your 7-year-old seems to be very interested in learning about finances, try using some tips from the 10 to 15 age group and observe how she reacts. It is the parents’ responsibility to secure their kids’ financial future by guiding them through a solid financial roadmap from their early days.

$75000 A Year Buys You Perfect Happiness

Happiness Comes At A Price

First Published: ADawnJournal.com September 19, 2010

The Beatles said Can’t Buy Me Love, and that All You Need is Love but a recent study done by Princeton University found that while you can’t buy love, you can buy happiness. In the study, 450,000 Americans were surveyed and analyzed. Between 2008 and 2009, the study found that there are two forms of happiness. There is the happiness that comes from being content day-to-day and there is the happiness that comes from being satisfied with who you are and where you are in the world. The study was done by economist Angus Deaton and psychologist Daniel Kahneman.

The study discovered that having more money will not increase the contentment you feel on a day-to-day basis, but it will increase the overall satisfaction that you feel in your life.

Not only did the study find that, but it also found that there is a specific dollar amount that gives you the most happiness. Once you go over this dollar amount, the amount of happiness and satisfaction you feel does not increase anymore. Once you hit the plateau of $75,000, your day-to-day happiness no longer increases. So, if you have $1 million, you will have the same amount of happiness that you have at $75,000. Your overall satisfaction can still increase though.

One interesting fact is that the happiness you feel will be based on your income and where you are in a specific country. For example, in the United States, you would need to earn $163,000 in New York City to have the $75,000 level of happiness. In Chicago and Pueblo, Colorado, you would need to earn $84,750 and $62,000 respectively.

This doesn’t mean you are going to buy your happiness with things but money will help you feel better in your life. When you are living paycheque-to-paycheque in your life and you are wondering how you are going to pay your bills, you are often not very happy. However, as time goes on and you make more money, you will begin to feel better and happier. Waking up in the morning knowing you won’t lose your house will make you happier and more content. When you know you have enough money to go out for food, to buy some of the things you want and to go on vacation, you will be happier.

Now, that all being said, if you are going to be happy with your $75,000, then you cannot decide to just go and live a $100,000 lifestyle. You need to live within your limits because if you don’t you are going to suffer financial stress that is going to lower your contentment and happiness. Remember, live within your limits and that way you will be happy. In American right now, millions of people are living outside of their means and that puts immense financial stress on their lives and their families. You do not want that, so make sure you have your happiness at a price you can afford.

If you don’t make $75,000 you can still be happy, but that $75,000 limit is something you should shoot for to be financially happy and emotionally content within your life.

How to Raise Financially Responsible Kids

Teaching Kids Financial Responsibility

First Published: May 9, 2010 ADawnJournal.com

Teaching kids about money and financial literacy is an ongoing process and it is as significant as teaching kids about general education and other life disciplines. Grasping the significance and value of money at an early age will help kids to realise the importance of being financially responsible and respect money, thus helping them navigate their life more smoothly in financial terms. Today, I will discuss some simple steps you can take to make your kids financially responsible in later years.

Understanding Why Money Is Important – The first important thing you can do to is to make kids understand what money is and why it is important to be responsible with it. Explain what money can do; for example, it helps to live a good life, support family and friends, and it helps to support those who are in need and their favourite charities.

Start Early – Children are able to recognise and show interest in coins when they are 4+ years old. Grab this opportunity; when they start showing interest, help them identify different types of coins and bills. When you go for groceries and money exchanging deals, start letting your kids interact with merchants. This will teach interactions with others in general and in terms of money.

Action is Louder than Words – Talking nice things about money is not going to do anything unless you show your kids that you do what you say – and you believe in what you do. Don’t just tell them to stop spending wastefully; set examples by doing the same. Don’t just tell them to invest for the future; do the same and show them how you are doing it regularly in your mutual fund or investment accounts.

Be Careful with Allowance – Do not pay kids an allowance without giving them proper guidance towards how to spend it. Break down their allowance into smaller parts, such as 10% should go to the piggy bank, 20% should go to science magazines, and so on. It is recommended not to pay kids for regular house chores that they would normally do. They can get paid for special projects for which you would normally hire outside people such as mowing the lawn, cleaning the backyard, etc. – if they can complete it successfully.

Bank Accounts and Credit Cards – Bank accounts and credit cards are a part of daily living in the 21st century and kids should be taught about it once they are 7 – 10 years of age. Explain to them how banks and credit cards work, how and why credit cards charge interest, what to do to avoid paying interest, and so on. Open savings accounts for them, give them credit cards (with lower limits and supervision over how they use it), and walk them through towards becoming a financially responsible adult.

The Importance of Saving Money Early – Once kids start earning, teach them the beauty of saving money. Encourage them to save 15 – 20% regularly and continuously as they enter adulthood. Saving is a virtue that needs to be practised from an early age. If kids can make saving regularly a permanent habit, they will be able to reach financial goals much earlier and will live a happy life.

Learning to Spend Less – If there is one financial tip that is considered the number one tip of all time this has to be it: spending less than you earn. Teach kids to understand this concept and tell them that if they can follow it religiously, they will be wealthy one day.

Learning to Appreciate What We Have – We are privileged to live in one of the wealthiest countries on earth where abundance is everywhere, including riches. Many other nations are not as privileged as we are. Teach kids to appreciate and to become grateful for what we have and show them the joy of giving and sharing.

Keep in mind that “children do what they see.” Parents and adults can be role models by taking sound financial steps. The onus is on you to secure your kids’ financial future by guiding their financial journey through a solid financial roadmap from their early days.

Compound Interest Basics

The Idea of Compounding

Compound interest is something consumers hate. With compound interest, not only are you charged interest on the principle, which is the money you borrow, but you are charged interest on the interest. The interest compounds on itself, making you pay more and it is something most people could do without.

Compound interest has actually been with humanity for quite awhile, dating back 2,000 years to the days of the Roman Empire. Back then, compound interest was regarded as the worst type of usury and it was condemned under Roman law. As well, the Qur’an and the Bible both contain references to compound interest. In the Qur’an it says “O ye who believe. Devour not usury, double and quadrupling. Observe your duty to Allah, that ye may be successful.” In the Bible, there is a reference to it in Leviticus 25:36-37 which reads “Take no usury or interest from him; but fear your god, that your brother may live with you. You shall not lend him your money for usury, nor lend him your food at a profit.”

In 1613, Richard Witt wrote Arithmetical Questions, which is considered a landmark book on compound interested. Completely devoted to the subject of compound interest, it was in sharp contrast to other books because most devoted only a chapter to the concept.

Enough about the history of compound interest though, how does it work? Well, if you take out a loan that has interest compounded on a monthly basis then it will work like this:

The loan is for $1,000 and you have one percent interest per month, which means that at the end month one you owe $1,010, and at the end of the second month you owe $1,111 and so on. So, the interest from month two is being added to the principle you owe, plus the interest you owe from month one. Naturally, this can quickly get out of control, especially when you are dealing with very high interest rates.

Most people prefer to see interest as a yearly percentage and for this reason many governments force banks and other financial institutions to disclose the equivalent total interest for the year. So, for one percent interest per month, the annual percentage rate would be 12.68 percent. This prevents people from being misled into thinking they are only paying one percent interest on their principle.

Compound interest should not be confused with simple interest, which is interest that is not compounded on top of it. Sadly, simple interest is not used very often. Compound interest is used quite a bit in finance and economics and if you have a credit card, you are paying with compound interest.

It is important to look at the laws dealing with usury to ensure that you are not becoming a victim of it through compounding interest. You want to ensure that when you get a loan, you are not going to be paying interest on interest to a degree that could cause you to default on the loan itself.

How Compound Interest Works

Making Money with Compound Interest

First Published: June 17, 2010 ADawnJournal.com

Compound Interest 101

When most people think about compound interest, they think about credit cards and how they lose money with compound interest. Most people hate compound interest, and they want nothing to do with it but what about if we told you that you can make money with compound interest? What about if we told you that there is the possibility to make money with something that you only think about as a bad thing?

Well, you can if you know how to use compound interest properly.

The first thing you need to do to make money with compounding interest is to start saving at a very early stage. Many experts will tell you that it is not how much money you begin to save with, but how early you begin to save. If you start saving at the age of 20, $2,000 a year, you will save $20,000 by the time you hit 30. That is much better than throwing down $20,000 at 30 and it is easier to handle on your pocket book as well. You also make more money on the money you save earlier. That $20,000 from the age of 20 to 30 will grow because of compound interest, while that $20,000 at 30 will not. The best way to look at this is with an RRSP. So let’s do some examples to show how compounding interest can work.

If someone is the age of 20 and they put in $5,000 into their RRSP, by the time the person is 65 that amount of money will have grown to $160,000 if it grows at eight percent per year. That may seem like a lot of money but it is not when you are trying to retire. Compounding interest works here because each year, the interest is put on top of the total amount in the account. Here is how:

• Age 20: $5,000 x .8 percent $5,400

• Age 21: $5,400 x .8 percent $5,832

As you can see, the interest has gone on top of the previous amount made from interest in the past year.

How do you make the compounding interest work for you then? By putting away money every single year, without fail. So, if a 20 year old puts away $5,000 every year, then by the time they retire they will have saved a staggering $1,932,528.09. That is enough to retire on! Here is how it happens:

• Age 20: $5,000 x .8 percent $5,400

• Age 21: $10,400 x .8 percent $11,232

• Age 22: $16,232 x .8 percent $17,530.56

That is how easy it is to build your investment over time using compound interest when you put money into your RRSP each year. When you do invest this way using compound interest, you need to remember three things:

• Begin the process early because the more you contribute early, the more money you can make on compound interest.

• Keep your investments regular and do not allow gaps in when you invest each year.

• Give it time to build. Do not be impatient because it is a slow process that can keep making you money if you give it the time.