At this time of year, young people across the nation are graduating from high school and college and preparing to take charge of their financial lives.
If you listen closely, you can hear wallets groaning from coast to coast.
Now, this is not another rant against millennials and other whippersnappers. Americans of all ages are hopelessly behind the curve when it comes to handling money responsibly.
But unless young people have a natural interest in personal finance, they are at a high risk of making financial mistakes that lead to chronic debt.
Fortunately, if you are a grandparent, you can help. Pass on the following lessons to your grandchildren — whether they are graduating now, or just dreaming about doing so one day.
1. Debt is a form of slavery
Runaway debt can create havoc in your life. What happens if you lose your job or get an illness that health insurance does not cover? How much stress would you feel in that situation?
Debt, especially unsecured consumer debt, is a form of slavery. The debtor is beholden to the creditor because each day the debt remains unpaid, interest charges pile up. Over time, it’s easy to see how the unchecked use of credit can erode wealth and foreclose opportunities.
If your grandchildren already have fallen into debt, remind them it’s not too late to climb out. Check out “Resolutions 2020: Crush Your Debt in 3 Simple Steps.”
2. Financially successful people live below their means
Financial success is usually the result of years of self-control. A big part of that discipline involves living within or below your means. If every dollar that comes into your life has to go out, there’s little hope for getting ahead.
Remind your grandchildren to keep their overhead lower than their income, and to pocket the difference. And urge them not to let every bump in income become a boost in lifestyle.
3. Pay yourself first
Learning to pay yourself first is an important part of financial security. Direct a healthy portion of your income into an IRA, 401(k) plan or savings account before your paycheck even hits your account. Otherwise, you’ll have to constantly fight the temptation to spend every dollar.
Tell your grandchildren to automate savings and make that an unwavering part of their routine. Doing so puts the twin forces of time and compounding interest on their side.
4. Forget about impressing the Joneses
It’s easy to access some of the trappings of wealth in our society, but it’s difficult to actually afford them. Buying new cars, big houses and designer handbags might impress others, but these goods often mask high debt and a precarious relationship with credit.
Don’t confuse easy access to credit with real wealth. Although it doesn’t seem nearly as sexy, real wealth is usually the product of responsible spending, maximizing the value of every dollar and trading glitz for modesty and security.
You’ve learned that lesson over a lifetime. Now, pass on the wisdom to your grandchildren.
5. Save aggressively early, and you won’t have to save so much overall
Saving is a long-term proposition. No matter how modest the amount, starting the savings habit early pays off. A broader time horizon means more years to:
- Benefit from compounding interest
- Experience upswings in the market
- Recover from downturns in the market
- Refine your investment style
6. Craft clear financial goals
Financial goals can be too broad — buy a house, save for retirement and keep paying our bills. To succeed financially, goals need a big dose of specificity.
For example, it’s fine to shoot for buying a home. But what kind of house suits your needs and lifestyle? What size of down payment would leave you with a comfortable mortgage?
Grandchildren who can answer these questions in detail will have better-defined goals that, in turn, can motivate them to make better financial decisions.
7. Don’t believe everything you hear about money
Looking to popular culture for cues on how to manage your money is a bad idea. Avoid get-rich-quick schemes, and tune out people who tell you that purchasing the nicest clothes, the flashiest cars and the hottest stocks will make you rich and happy.
Instead, steer your grandchildren toward reading websites like this one, and learning from the experiences — and mistakes — of others. To rise above the financial clutter, grandchildren need to become students of personal finance and critically assess the information that’s at their fingertips.
8. Set your own spending limits — and stick to them
In life, there is no shortage of companies trying to get you to spend — from credit card lenders increasing your credit limit to banks steering you toward the largest mortgage for which you qualify.
Don’t let these companies set your grandchildren’s personal spending ceiling. Instead, encourage them to decide for themselves what they can afford, what they’re comfortable with and what their priorities are.
Tell them to remember that they are in charge of making money and they decide how it gets used.