Personal Finance Topic #196 - Children and Money (ages 15 and older) - Part 3

This is third and last post to talk about a parent, his/her children, money, and relationship that exists relating to money.  In this post, we again focus on older kids who are living independently.

3 basic concepts that children must know about becoming financially independent:

1. Always have an emergency fund - This is what Dave Ramsey calls "Murphy repellent." When emergency happens (and it happens a lot to young folks), it can also become a money problem.  If you have a car accident or medical emergency, you may need $500 or $1,000 deductible.  If you don't have the rainy day fund, you are inevitably pulling out a credit card (to borrow money that you may not be able to pay for).    
2. Learn to live within your means - Those children who've never been stopped to buy whatever they wanted, student loan, car loan, and even the first home, has not heard someone say, "No." Their wish list may become a "need" rather than a "want."  Soon, they are living beyond their means.  When I was a First Lieutenant in the U.S. Air Force, I read in the Air Force Times that 3 rd year after becoming an officer is when an officer has high probability of experiencing money trouble.  The reason, simply, is that no one was there to say, "No," when he/she decided to buy that stereo, camera, new car, and even a new mortgage, soon after he graduated.  Monthly payments kept piling up for couple of years.  Kids must know that money does not grow on trees, and that it is finite.  Don't borrow money.  Save up to pay for it in cash (except for mortgage with 20% down or more).
3. Start investing early and consistently. If a child starts investing $50 a week at age 19 and increases her contribution by 3% each year in a Roth IRA (investment rate of 10% a year), she will have almost $4 million Tax-Free by the end of age  67!  Do a direct deposit into a mutual fund each payday, and she'll never miss the money.  Don't deviate from consistent saving and investing.  Compouding interest idea works only if you continue the compouding.

No cosigning! One verboten item is the idea of co-signing.  Co-signing is same as enabling.  Why do you think someone needs a cosigning?  Because the lender believes the borrower won't pay back.  Don't cosign, and don't ask for cosigning on a loan.

If you teach your children these basic concepts, they will not come back asking for money help, and they will have financial freedom.