Wednesday, March 16, 2011

The Four Money Quadrants: Teach Kids Good Money Habits They Can Live With

As Teachers, Parents, Grandparents, Godparents, Friends, etc. it is our job to teach children good financial habits as early as possible by demonstrating to them how to properly distribute their money. After all, children are our future. The lesson here is to teach your child not to live their lives from check to check or above their means, but to live in a happy balance. By getting your child into the habit of dividing his money into four specific categories (Spend, Save, Donate and Invest), he will grow up to be more responsible with his finances, thus, possibly not being affected adversely by any bad economic times.

The trick is getting the percentages right. Some good numbers to shoot for in adulthood is Spend 70%, Save 10%, Give 10% and Invest 10%. For younger children the Spend percentage should be much lower whereas the Invest percentage should be much higher – of course it will be different based on the individual!

Spend: Teach your child to spend a percentage of their money. Do not teach your child to be a miser with their money, for this can lead to negative associations with money. Teach him to celebrate his achievements and enjoy the fruits of his labor. Allowing your child to spend their money on anything they want with this portion of the money (within reason) can be a great self-confidence booster. As an adult this portion will be used for living expenses including the necessities like paying the mortgage, car payments, insurance premiums and buying food as well as for entertainment needs.

Save: Teach your child to save a percentage of their money for bigger ticket items that they cannot immediately buy like a digital camera, a laptop or even a car. This can teach the importance of goal setting and the virtues of patience and of delayed gratification. As an adult this portion would be your liquid money that may be called the “Emergency Fund”, the “Rainy Day Fund” or even the “Saving up to finish the basement Fund”. It is very important to have that extra savings on the side for any unexpected expenses as well as for any expected future expenses.

Donate: Encourage your child to give a percentage of the earned income to charity. Teach him the joy of giving back and helping others. Also, there is actually scientific proof that giving is good for your health. I don’t claim to be a scientist, however, apparently when you give; you get a good feeling, and that is because endorphins are released in your body. This release of endorphins is supposed to be healthy. Besides the health benefit and the fact that it is the right thing to do, you will be bringing up a compassionate person that will not be “all about me.” There is a great quote by Jim Rohn that states, “It's best to start the discipline of generosity when the amounts are small. It's easy to give ten cents out of a dollar; it's a little harder to give a hundred thousand out of a million.”

Invest: Help your child invest a percentage of their money. There are only three factors to the “Wealth Equation”: Money, Interest Rate and Time, where Time is the most important. And who potentially has the most Time? That’s right, our children do, that’s who! Teach your child to save for the future and have his money compound and work for him. A relatively insignificant amount of money invested over a long period of time can potentially grow into a very significant amount of money. Jeff Olson, author of The Slight Edge says on the topic of investing, “It’s never too late to start. It’s always too late to wait.”

By teaching your child the four quadrants of money at an early age, not only will you be instilling the important habits needed for them to become successful in their finances, but for them to become successful in life.

My Canadian counterpart Stephanie Holmes-Winton of The Money Finder and contributing author to Difusing Debt Blog has written a related article that was inspired by this post. I would recommend that you read her article also, titled Everyone can be a "Saveasaurus".

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.
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