The tagline for the iconic action figure brand G.I. Joe was “Knowing is half the battle.” While “knowing” may not actually be 50% of what you need to successfully manage your money, it’s a big part of it.
On a scale of 1 to 100, how well do you know your family finances?
Many people don’t know how much they actually earn every month, nor how much they actually spend every month. Many don’t know how much debt they have, or the value of their assets. With that information, it’s easier to understand why 2/3rds of Americans are living paycheck-to-paycheck.
It’s essentially like an ostrich putting its head in the sand.
Understanding your cash flow is a foundational part of personal financial success. The ideas in this post are designed to help you teach your kids about how to manage cash flow. Like most things, the earlier we can instill positive habits, the better.
We’ll talk about four key ideas to reinforce, and how to actually teach your kids about cash flow.
- Spend less than you make
- If you can’t pay cash, you can’t afford it
- Don’t run out of money
- What gets measured gets managed
- How to do it
Let’s get started.
Spend less than you make
This sounds obvious, but it turns out to be a lot harder in practice. The last thing I want for my kids is to see them get trapped in the vicious cycle of living paycheck-to-paycheck.
It’s becoming easier and easier to overextend ourselves. We live in a time where companies are looking for recurring revenue and are accomplishing that by selling subscriptions. If we’re not careful, we’ll end up accumulating a ton of monthly charges. Becoming more aware of this and making a consistent effort to review your recurring expenses is the first step in avoiding or getting out of this trap.
If we’re not paying close attention to our spending, we’ll end up with more month than money. Meaning, we’ll get to the midway point of the month and be broke.
If you can’t pay cash, you can’t afford it
Now, I’m not necessarily saying you shouldn’t use credit cards, but I am saying you should only use them responsibly. That means you pay off your balance every month. If you find you’re rolling balances over, you need to stop using credit cards immediately.
The reason being, you’re paying huge annual percentage rates on your debt. If you do this, you’re setting yourself up for financial failure.
I’m also not saying you should only pay cash. I’m saying if you don’t have the ability to pay with cash, you shouldn’t use a credit card. Odds are, there will always be things we finance, like homes and cars. For everything else, it’s wise to hold off and save up before buying.
Don’t run out of money
I remember running out of money. Do you?
I’m not sure if I was alive before credit cards, or just didn’t have one, but there were plenty of times when my ability to consume stopped because I ran out of cash.
Just as we make sure we don’t run out of gas when we’re driving, we need to ensure we have the cash reserves so we don’t run out of this essential resource. Talking with your kids about the importance of an emergency fund is essential. There was research released a couple years back talking about how the majority of Americans couldn’t come up with $500 in case of an emergency. This is unacceptable.
And thinking of a credit card as your emergency fund is also a mistake. All too often, when things get back, banks will pull back credit limits. If credit was your emergency plan, you’d be in big trouble.
What gets measured gets managed
This was made famous by the great Peter Drucker.
You’ve got to pay attention to your finances and revisit them consistently. Most people don’t know how much they make, how much they spend, how much debt they have, or how much they’re investing and have invested. You need to know your net worth.
I can’t encourage you enough to be tracking these things for you and your family finances. When you do it, it makes it a lot easier to talk with your kids about it.
How to do it
I advocate you pay your kids a weekly salary. It’s not an allowance. This is money they earn by completing their jobs and responsibilities.
My suggestion is that you begin with a $5 weekly salary. I break it out into three categories, Spend, Save and Give. $2 for Spend, $2 for Save, and $1 for Give.
While there are a lot of great apps and technologies for doing this, I think it’s important to give them cash, and to put the money in three clear jars.
You’re more than welcome to give your kids more than $5. What’s important is the breakdown of 40% of the salary to Spend, 40% to Save, and 20% to Give. Even if you start with $5, you’ll eventually increase it over time.
Payday is one of the happiest days for everyone. It can be the same for your kids.
I suggest you designate one day and time every week for paying your kid’s salary. That way, you won’t forget to do it. We do it Sunday morning in our house.
Cash flow audit
Remember checkbooks? Remember balancing your checkbook in the back of your checkbook?
Helping your kids track their spending now will help them to make it a habit. You can do this by hand, or in a spreadsheet. The important thing is finding what works and sticking to it.
It’s also wise to keep a running balance of each jar. This is a simple and practical way to teach them about cash flow.
Review progress towards savings goals. As your kids are saving money for something they want, track the progress with them. They may want to talk about it everyday, or once a week. At the very least, I encourage you to review their cash flow and net worth on a monthly basis.
That’s right, their net worth. Use that language. Talk about “cash flow” and “net worth.” You want them to take this seriously, because it is.
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