Hardly a week goes by without a new report lamenting the state of American workers’ savings and retirement preparation. Whenever I read these reports, I try to look past the dour numbers and visualize the individuals and families behind these statistics. How did they get in this situation? What choices put them in a precarious position? Or what choices did they not make that would have put them on firmer financial footing?
I imagine in some cases there were extenuating circumstances or uncontrollable events that complicated their financial picture. But I also know many others only have themselves to blame. They weren’t smart with their money. They spent more than they earned and took on too much debt. They didn’t save as much as they could and as early as they could, and missed out on the power of compounding.
Most people don’t learn these financial lessons in school—they learn them as they go, if they learn anything at all. Quite often, financial knowledge comes later in life, well past the ideal time for the lessons to take root and make a difference. For example, learning the power of compounding at 45 or 55 doesn’t leave much time to put this knowledge to work in a retirement savings plan. (For related reading, see: Financial Planning Tips for Parents and Their Kids.)
How to Learn Financial Lessons
I’ve been thinking about financial lessons and financial literacy lately, especially while I watched television with my children. Our family tends to watch more TV during these colder months, when the weather keeps us from our favorite outdoor pursuits. Some of the shows we watch together include The Profit, Bar Rescue, and the kids’ favorite, Shark Tank.
We like to watch the small business owners on these shows try to turn their ideas and dreams into profitable, sustainable companies. But I’ve also found a great opportunity to talk with my children about money. My hope is in teaching financial important lessons from these shows, I can give my kids the financial knowledge they need to make smart decisions about money on their own. (For related reading, see: How to Budget and Spend to Maximize Your Happiness.)
Here are some of the lessons from the Shark Tank sharks I’ve discussed with my kids in recent months.
- Cash flow is king. If you know the show, you likely recognize Mr. Wonderful’s mantra. Even my girls now ask does it make money? Before the sharks do. We talk about the difference between a start-up business (with no cash flow) and an established one (making money). My kids understand you can’t call yourself a business until you clear three cash-flow hurdles: Pay the bills, pay the owners and pay back the investors or reinvest what’s left over back in the business.
- Don’t jeopardize your family. It’s common for Shark Tank contestants to get funding for their business ideas by borrowing significant sums from family members. Quite often, these family members aren’t in a financial position to loan out this kind of money. This debt is not only risky for the entrepreneurs, it’s risky for a family’s finances as well and sets the stage for family relationships to sour.
- Borrow only if you can afford to. That’s not to say all borrowing is bad—it can be a valuable tool for small businesses when they’re in the earliest stages. But for those that borrow too much, the weight of the debt can crush their ideas before they leave the ground. Understanding how debt works and how to manage it effectively is a critical lesson to learn, even at a young age.
- Save for a rainy day. Kids understand that things change—their lives change nearly every day, and often dramatically from one year to the next. So I talk to my kids about being prepared for change and how saving money can help a business and themselves manage through difficult times.
The financial lessons I try to pass along to my children also bubble up to how my wife and I manage our household finances and plan for our family’s financial future. Understanding cash flow helps us live within our means. Spending more money than we earn would fail the first rule of managing our cash flow, much like the business hopefuls who have a wealth of ideas but none that make money.
Instead of jeopardizing our family’s future, we plan for retirement and other large purchases. Building a solid core for our family’s finances helps us establish a foundation from which our children can thrive.
By borrowing only if we have to, we avoid credit card debt, and mortgage only what we can pay comfortably. Distinguishing good and bad debt allows us to manage our borrowing effectively.
Finally, we save for a rainy day by building a cash reserve. Change happens to a family too. With a healthy rainy day fund, my wife and I feel financially prepared for whatever the future brings.
I encourage all parents (and grandparents too) to begin talking with your children about money. The financial lessons you can teach them, not only through your words but your actions as well, will imprint knowledge and habits they will carry with them throughout their lives. Financial literacy is not being taught in schools. So take any relevant opportunity you find—whether it’s watching TV together or other family activities—to start their financial education. (For more, see: Why Paying Down Debt Faster Is Not Always Better.)
Milestone Wealth Advisors, Inc. is a Registered Investment Advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.