How to teach your children financial literacy and build generational wealth

financial literacy

Disclaimer: * This may contain affiliate links* I’m not a licensed investment adviser. Also, I’m not a tax adviser and this is NOT tax advice and not investment advice. Please talk to a licensed investment adviser before making any financial decisions. Please talk to a licensed tax advisor before making any tax decisions.

“Do not give your children the stuff that you wish you had, teach them the things you wish you knew. ” 

What is Financial Literacy?

Essentially it is the ability to understand and apply various skills in a finance context. These includes budgeting, investing, and just overall management. 

Many skills fall under this umbrella of financial literacy. These include saving for an emergency, paying off debt, setting up beneficiaries on an account. Fortunately these skills can be learned by studying different financial concepts, like how compound interest can be your best friend (investing/savings) or your worst enemy (debt).

Start from the beginning

generational wealth

Since financial literacy is a skill that must be learned and it can start from childhood. If you are learning these skills as an adult, do not worry, you are starting the wheel of building generational wealth. You are the beginning, and teaching your children these skills only means that they will also have the ability to keep those wheels turning. 

Remember many families had to start somewhere, one person changed and made a decision that affected the lives of their descendants. Historically we do not have to look very far, look at the Industrial period, how many families built generational wealth that is still building today. Granted, some lost it after a 3 generations but the point is that if they can build, so can you. 

So how do you teach your children?

Children are sponges, they learn by example. This means that the parents also need to have to be financially literate, however, this does not mean you have to be debt-free. They can watch this journey of yours and learn from it. There are a few ways that you can teach a child, some are examples from my own childhood.

  1.  Instead of an allowance, think about having a paid chore list. Not only does this help build a little work ethic, you can teach them the value of how much time it took vs. the value of that chore amount. For instance, let us say that washing the dishes two nights a week earns them $0.50 each time. This took them 10 minutes to complete each time. They want to use these earnings to buy a $1.00 candy bar. You can use this as a teachable moment that the bar is not just $1.00 but it is also worth 20 minutes of their time.
  2. Teach your children about taxes and have them ‘pay’ a percentage of their income. You can set this aside for them to give when they turn 18. 
  3. The pay-yourself-first mindset.  Teach them how important it is to pay yourself first every time they earn. Use this money to open a savings account for them, allow them to watch it grow. Kudos if you can put it in a high yield savings account (HYSA).  However, the current rates leave something to be desired but it is better than nothing.
  4. Open a custodial IRA and teach them about investing. Make sure they are an active participant, teach them how to invest, and engage them. Perhaps you can let them choose a couple of stocks aside from the normal ETFs that are normally recommended. Explain the process of choosing a stock and all that goes into it.
  5. Model good behavior. In short, practice what you preach.  If you are making good money decisions and your children see it, you can ensure that they will see its importance.

Let financial literacy be your legacy

It is a popular thought that every generation has the desire for their children to have a better life. This does not only apply to material goods, but essentially do not give your children stuff that you did not have, teach them the things you wish you knew. 

Knowledge is what is passed down through the generations, this is clear in the archaeological record. We see that knowledge passed down and how it evolves. Every generation tried to build upon it, it is the same mindset you need when teaching your children financial literacy.

Let it be their form of inheritance and your legacy that is passed down. The cycle of generational wealth starts with you breaking the cycle of generational poverty.

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