by Jenny Smedra
Personal finance has become a hot topic of conversation in our house. Last week, my family had an interesting conversation around the dinner table as we discussed tax returns and college scholarships. While we laid out our plans and to-do lists, my youngest niece made a keen observation. She wanted to know why students didn’t learn how to do these things in school. In short, I didn’t have a good answer for her. There are many important financial lessons we should teach the next generation, both at home and in school. More importantly, they can also learn from our financial mistakes.
5 Financial Lessons to Teach the Next Generation
This question caused us all to pause and reflect back on our financial education. Admittedly, there were some serious gaps in knowledge that led to some big financial mistakes. My parents and I discussed some of the lessons we wished we had learned sooner. It seems we had all made some unwise money decisions, and had many personal stories to share on the subject. However, there were a few that seemed to be a recurring theme. As I asked more friends and family members, here are the five financial lessons that we felt were important to teach the next generation.
1. Always have an emergency fund.
Sometimes, life throws you curve balls. No matter how much you try to plan ahead, there will be unexpected surprises along the way. That’s why you need to have an emergency fund so you have cash on hand to take care of these expenses. Having an emergency fund could have bailed me out of some hard spots, especially when dealing with medical bills, insurance deductibles, and car repairs. Keeping a stash of cash can also prevent you from racking up more debt on credits cards or having to pay interest on borrowed funds.
Financial advisors recommend saving at least six months of income. Even if this is not viable in your current situation, saving any amount is better than none. You can also look at high yield savings account which will earn you more interest than traditional ones. Furthermore, building this fund sets a good example and creates the habit of making regular contributions to savings accounts.
2. Learn how credit and credit cards work.
As a young adult, I did not understand how the credit system or credit cards worked. I thought that as long as I saved my money and had enough to pay my monthly bills, that I would be comfortable. It wasn’t until my freshman year of college that I learned just how easy it is to get buried in credit card debt.
Credit cards can be an important tool in building credit. Unfortunately, I became very irresponsible with mine, and accrued thousands of dollars’ worth of high interest debt. I was making the minimum payments each month, but I was still going deeper and deeper into the red. After I defaulted on a payment and was turned over to a collection agency, I realized I needed to take control of my spending. Although I could not undo the damage, I created a strict budget that got me get out of debt and taught me to live within my means.
One thing that has helped me remain debt-free was getting rid of several credit cards once I paid the balances in full. Having too many cards in my wallet was a temptation I didn’t need. In hindsight, I realize the money I spent paying off the interest would have better served me in other ways.
3. Start saving for college.
As my oldest niece prepares for the SATs and college applications, she is realizing that higher education is expensive. Student debt is a major burden for many of us who took federal and private loans to pay tuition fees. According to the latest figures, Americans have more than $1.71 trillion worth of student loan debt. In 2019, students graduated with an average of $29,900 in student loans.
Beginning your professional career straddled with this much debt makes it seem like you are fighting an uphill battle. That is why we all agreed that it is important to start saving for college as soon as possible. When kids are young, you have time on your side to help you grow their education savings account. Even if you do not save enough to cover all their educational costs when they reach college, we can teach the next generation how to better manage their money and avoid crushing student loan debt.
4. The sooner you begin investing, the better.
One of my biggest regrets is that I missed out on several investment opportunities when I first entered the professional world. I was fortunate to work for companies that offered their employees many benefits. In particular, I wish I had used the employer sponsored retirement plans. Not only did I miss out on free money through their contribution matching, but I also missed out on nearly a decade of high returns from the stock market.
Had I taken advantage of the 401k options or began investing sooner, compounding interest would have earned thousands more for my retirement funds. However, it does no good to dwell on things I should have done. Instead, I applied the lesson to my current financial planning to get things back on track. Furthermore, I can help the next generation recognize and take advantage of the opportunities when they come along.
5. Keep your car in good repair.
This last lesson comes directly from my dad who has spent years servicing and repairing cars. Vehicle maintenance is an important part of car ownership, so you should make a point to keep your car in good repair. Not only does this help your car maintain its value when it comes time to sell it, but it also helps you avoid costly repair bills.
If you service your car regularly, you are more likely to catch the small repairs before they turn into expensive mistakes. This will also keep your car running longer which means more savings in the long term. If you upgrade or replace vehicles less frequently, you can save thousands of dollars in unnecessary expenses.
Turning Mistakes into Learning Opportunities for the Next Generation
As we explored the financial lessons we have learned, everyone kept emphasizing one very important takeaway. We all make mistakes and sometimes learn lessons the hard way. But, rather than dwelling on our mistakes and kicking ourselves about what we could have done differently, we can use our experiences as learning opportunities. After my dance with debt and financial planning, I am certain I will apply the lesson and avoid the same mistakes in the future. Additionally, the financial traps we fell victim to are good lessons to teach the next generation in what not to do.
Although these financial lessons made my family’s list, which ones do you feel are the most important to teach the next generation?
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