Are you ready to start investing? According to Statista.com, “55% of adults in the United States are investing in the stock market.” Most kids don’t learn about personal finance and investing in school so it’s up to parents. Yet, as I pointed out in a previous article, Financial Literacy Warning! The News Isn’t Good and it’s Even Worse for Your Kids, most parents don’t know what they are doing. This is probably because no one taught them how to manage money either.
2 Steps for Kids Before Investing
- Work for money
- Use a budget
First, I recommend that kids work for money by completing chores and practicing good behavior rather than just receive an allowance. They must understand that money comes from work. This “cash for chores” income is supplemented by the money they receive for birthdays and other holidays. They can also earn additional money from completing other odd jobs around the house. In their teenage years, they might also earn income from babysitting, mowing lawns, or some other type of job or kid’s small business.
Next, personal finance can get very complicated, but there’s one fundamental tool that all kids should learn when getting started with money. This tool is also applicable to parents who need to improve their money management skills. Use a budget. There is no better way to control that you don’t spend more than you make.
For kids, the budget starts simple. The income from above (work for money) is divided into 3 broad categories. 70% to spend, 20% to save, and 10% to give. Before bringing up investing, they have to show mastery of keeping within these limits. They can also build up some money in their savings to have a starting amount to invest. For more about a simple budgeting and money management system for kids (that can easily be adapted and expanded for parents), see #4 in “Financial Literacy for Kids“.
4 Steps for Parents Before Investing
- Using a Budget
- $1,000 Emergency Fund
- 3- 6 Months of Expenses Emergency Fund
Overspending inevitably leads to debt and stress. It’s a burden to avoid at all costs. Another mistake that a budget can prevent is not saving and investing. Saving and investing are categories that should be in your budget. Pay yourself first by allocating at least 5-15% of your income to savings. Shoot for building a $1,000 emergency fund. This can cover unexpected expenses such as a car repair that can wreck your budget.
After you have the emergency fund covered, take that 5-15% and attack any non-mortgage debt. Once you have the debt paid off, the 5-15% goes back to the emergency fund to fill it to enough to cover 3-6 months of expenses. If this sounds familiar so far, these are Dave Ramsey’s Baby Steps 1-3. I’m a Ramsey Solutions Master Financial Coach. I’ve used these steps personally as well as coached dozens of family, friends, and clients. Dave has used them to help millions of people become debt-free.
Although I suggested 5-15% to get you through the first 3 baby steps, if you can do more than that, then go for it. That’s called gazelle intense (imagine a gazelle being chased by a cheetah). Many people work a temporary second job such as delivering pizzas to throw extra money towards their emergency fund and debt. If you tip your pizza delivery person and ask them how they are doing, they might reply with “better than I deserve”. This is kind of an open secret that they are working the baby steps to get out of debt.
Ready to Start Investing
Now it’s time for Baby Step 4 which is to invest 15% of your income for retirement. Has your kid mastered their 3 category-budget system and saved up enough to invest? Great, you have both completed the necessary steps and are now ready to start investing.