For years, I took every opportunity possible to teach my kids lessons about money, and many of these conversations occurred right before transitions, like in the car on the way to college or before they took off on a big trip or next adventure.
This week, separately, both of my daughters came to talk to me about money. This time was different. One is on her way to Ohio, briefly, before entering graduate school this January, the other is heading for a new job in Chicago. Barring unforeseen circumstances or some emergency, they won't be back to live under my roof except as occasional visitors.
Basic paths to wealth
There's no denying the bittersweet in the moment.
The girls came to me this week with a few touch-up financial questions, checks-and-balances things they didn't really need Dad to tell them, but where they wanted to make sure they weren't making a mistake as they set out on their own.
Mind you, we have had plenty of talks. I built them both stock portfolios filled with companies children can understand and recognize while they were growing up, helped them buy their first mutual funds for Roth IRAs when they started earning real money, introduced them to their older selves — the people they are really starting their retirement savings for — gave them advice upon entering college, at graduation , and more.
This time they wanted more nuts-and-bolts personal finance advice to make sure their instincts were right. It was a different kind of reminder, but one I suspect every child needs as they launch into the real world.
I'm glad they knew enough to ask the questions. Here are the lessons; go over them with your children just to make sure they've got it, especially if you never had the other talks with them along the way.
1. Costs always matter
One of the kids was looking into an app that would help her save money, effectively a "keep the change" kind of program. She thought it all looked good, and liked the fact that she could invest this way with a cost of $1 per month.
In dollar terms, she was right that the cost is no big deal. But when the program is talking about saving your pennies — when it sweeps your savings into an investment account $5 at a time, an amount that might represent someone's monthly savings — that single buck isn't so cheap. Small savings add up, and it happens much faster when charges are minimized.
My daughter simply wondered if there was "a catch." Nothing in finances comes for free; expect a catch and keep looking until you find it and can then decide whether the costs really are worth it.
2. Savings accounts are for holding money, not growing it
My oldest daughter has some money in an online savings account, mostly because she needed it to be liquid. But upon seeing that she was making more than $20 a month on the cash, she started to think "Hey, that's real money."
It slowed her from investing some of those dollars when they no longer need to be immediately at-the-ready. She saw the monthly $20 and forgot about the earnings potential on those dollars.
Far too many people save money, fear losses, or can't decide on an investment and stick with low-yielding money-market accounts or savings accounts because a return doesn't look so bad when it pays for a couple of pizzas each month.
They don't recognize that they are missing out on growth opportunities and, because their money isn't keep pace with inflation, they will be lucky to buy a few slices of pizza with that cash years from now.
My daughter realized the error of her ways when she couldn't answer a simple question: "What rate are you getting paid?" Upon comparing the rate to dividends she is earning on stocks, to interest paid on U.S. savings bonds — let alone with her investment returns from stocks and funds — it was clear that the savings account was a parking place for cash, not a place that moves your savings forward.
3. Knowledge about credit scores is crucial to having a good one
My youngest daughter was carrying a small balance trying to build her credit score, while my oldest was worried that her job status and low salary would hurt her score.
A recent study done by CreditCards.com and the 1,000 Dreams Fund showed that millennial-aged women have real issues when it comes to keeping a handle on credit, while TransUnion last month released a study showing that even people who check their credit score frequently are confused about credit basics.
Focus on your finances
My youngest needed to create a history showing she used credit responsibly, which can be accomplished by paying bills regularly and in full. Carrying a balance when it wasn't necessary was helping the card issuer, but wasn't doing much for her credit score.
Likewise, salary, age, and employment history are not factors included in a credit score. They may be evaluated by a lender before issuing a loan, but they aren't part of the credit score.
The lasting lesson: Use credit responsibly and pay bills on time; that way, the score takes care of itself.
4. Don't borrow money without a plan to pay it off
My youngest will have some loans for grad school, and had questions about the timing of payments, the rate, the affordability of the monthly nut, and more.
No matter what you are financing — a car, a vacation, schooling, or your next trip to the mall — your ability to afford the monthly payment is not a plan. You have to be able to afford that payment until the debt is extinguished, and ideally you'd like to get out of debt ahead of schedule rather than make payments for years or decades.
If you can't afford to pay cash for something today, you had better figure out how you will pay off the debt and find the best deal before ever taking on the loan. Otherwise, you will be carrying the debt — and damaging your finances — for longer than is worth it.