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Financial independence can be taught at an early age. It doesn’t mean that children have to know everything instantly, but we could start training them to handle money. With our guidance, they could make great decisions in their finances. Join your host Chris Larsen as he discusses five steps that will allow them to build a process and knowledge of money to understand the value of that money. They are destined to achieve financial success, and you can help them with that.
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5 Ways To Set Your Kids Up For A Lifetime Of Financial Success!
In this episode, I’m going to be talking about five ways to set your kids up for a lifetime of financial success. I’m going to be doing a solo show, so I’m going to walk through this process with you. Also, go to our website, NextLevelIncome.com/kids and download our free PDF to follow along. As a parent, you may ask yourself, “How do I teach my kids about money?” What do you personally do with your children to set them up for financial success? I’m going to walk through five things that you can start doing, teach your children about money and set them up for financial success. Before I get started, you need to have conversations about money with your children before going through this process. You want to make it comfortable.
In our household, we don’t talk about specifics. This doesn’t mean you have to talk about how much money you make or your net worth. Even though your children may ask you these questions, as they become astute and say, “How much money do you have in the bank debt? How much money did you get paid for that? How much money did we pay for that?” You can speak in generalities and that’s okay to get started, but it’s good to get them comfortable talking about these things. It’s good to have your children understand that when you perform the work that you do as a professional or in your business, that work produces an income and revenue that allows you to do things in your life. They can translate that into things like groceries, like when you go to the grocery store.
It’s okay to tell them what it costs for groceries, how much it costs to buy clothing, go on vacation or buy a new car. These things are important. They start to understand how much it is. These five steps are going to allow them to build a process and knowledge of money and allow them to start to understand the value of that money.
Also, we’re going to give you some more resources at that website, NextLevelIncome.com/kids. You can also get a book, but you can get books like from my partner, Danny Randazzo. For instance, The Boy Who Lost His Wallet. These are good books that can allow you to start having these conversations with your children about money. They’re going to give you prompts to do it. As you walk through these five steps, it’s going to make it that much easier. This doesn’t have to all be done at once. Let’s do it.
Starting A Bank Account
Step number one, start a bank account for your children. You can follow along on the PDF that you can download at NextLevelIncome.com/kids. This is the easiest step. You can do it immediately. You can go right to the local bank that you bank with and start this account for your children. You’re going to want to set up what’s called a Custodian Account.
Take your child with you when you set up this account. Let them get comfortable going into a bank. In this day and age of sending these virtual digital payments using things like Venmo, Bitcoin and Apple Pay, we work with our babysitters and don’t even pay them in cash anymore. We use Venmo or Apple Pay a lot of times. It’s important to have children understand what a bank is and what a bank account is. That will also allow them to deposit things like the money they get for their birthday, holidays, or if you pay your kids an allowance. They can deposit that there as well.
The other thing that you’re going to want to do is order what’s called an accounting ledger. This is off of Amazon. If you go to the PDF and Step to Pay Your Children, there’s going to be a link for this. We’ve gotten away from having a balanced checkbook. The accounting ledger allows you to put in the date, description, account and payment for the deposits that you make.
Paying Your Children
Step two, pay your children. We pay our children a $1 a day allowance, but we call it a salary, so our children know that they get $1 every day . What do they have to do for that dollar or salary? They unloaded the dishwasher, vacuumed, did their laundry or cleaned up around the house. We have a pool. They scoop leaves out and clean the pool and they do general family tasks. What happens if they don’t do those things, their chores, tasks, daily jobs? They don’t get their salary. If they don’t show up, it’s the same thing. If you’re at a job and you don’t show up, you’re probably not going to get paid.
Financial Success: It’s good to have your children understand that when you perform the work that you do as a professional or in your business, that work produces an income that produces revenue that allows you to do things in your life.
What about they’re disrespectful to their parents? You have a consequence. You can put a debit in their accounting ledger. If they’re disrespectful, they might lose $5 and have a serious consequence if they leave the door open or the lights on. This is wasteful in our household. We feel that that’s a waste of resources. We want to make sure that our children understand that there’s a value attached to that.
As your children understand that there’s a value attached to your time, effort, job, business and you get paid for that, they should also understand that if you’re wasteful with money, you’re losing that time and value that you’ve provided. Start an account, pay your children and use that accounting ledger. It’s neat to see how competitive it is.
You can pay your children in your business. You may be surprised to learn that they can start working out there once your children are about eight years of age. If you have a business, consider things like modeling. We have a blog and use a lot of pictures on our blog. That is an area that we can use our children for models. We can pay them for that service.
Do you have company cars? I don’t know what it costs you, but it could be hundreds of dollars if I get my car detailed. I’d much rather pay my son. Maybe a more modest amount of money, say $50, to clean and wash the company car and do that. We have Airbnbs. What about having your children manage your real estate properties or having a role in managing and cleaning those? We pay cleaners somewhere between $50 and $150 to clean our properties. You can also utilize your children in that capacity. They can have a cleaning service.
Teach About Investing
Our goal is to have our children work at least ten hours a week. That’s only a couple of hours a day. There’s a lot of things that can be done in that time. If you pay your children through your business and work with your accountant, make sure you set things up properly but once they have that earned income, what’s great is you can do things like setting up a Roth IRA that they can contribute to this earned income. That flows right into step number three, which is to teach your children about investing.
We do a couple of things. A few years ago, before our boys had Roth IRAs, I would take my boys to the bank. Let’s say they made $30 in salary in their allowance that month. They had an average month. What I said was the Larsen family role. Our goal is to save 50% of what we make after taxes. They’re not paying taxes on that $30 cash that we transfer into that account.
For all intents and purposes, that $30 is after-tax for them. They have $30. If they say $15, I will match that $15. I’m out of pocket $45, but my boys have $30 in the bank and $15 in their pocket that they can go spend. I have the same incentive. For instance, if they get $100 for their birthday, if they put all $100,000 in the bank, they’ll get a $100 match for me. If they put $50, they’ll get a $50 match.
What happens is they get to spend that $50 and get $100 that’s in the bank. It’s neat when you have two children to watch them be competitive with their bank accounts. It’s cool. In this age of very low-interest rates, you get barely over 0% at the bank. Seeing a few cents in a bank account isn’t that motivating but seeing your $1 deposited grow to $2 immediately is some nice instant gratification. It’s a simple way that teaches children how money can work for them if they save it. Step one is to save.
Financial Success: This is the easiest step you can do immediately. You can go right to your local bank that you bank with, and you can start this account for your children. That is also going to allow them the ability to deposit things like the money they get for their birthday for holidays.
In this show’s philosophy, we talk about making, keeping, and ultimately, growing your money. This is a keep strategy. Let’s figure out how to save your money before we start to grow it. Once you’re at that stage where your children have earned income, you can set up a Roth IRA. You can set this up through a lot of different brokerages. We use Vanguard.
I’ve been using Vanguard since I was in college, eighteen years old myself. I’m very comfortable with it. You can set up one of these custodian accounts with almost any of the larger online brokerages that are out there. We do the money they earn that’s been deposited via paycheck into their bank accounts. We automatically pull that out and put that into their Roth IRA regularly.
They never get to touch that, but they get to see it and here’s how. We make paper statements. Those paper statements come in and it has their name on it. Both of my sons get their statements every month. They open them and get to see the amount that their account has grown over that month, quarter or year. The conversation that we have around that is how much money did you make this month in your salary? If it’s $30, they can then look. In some months, they may earn $100 from their investments, from the growth that they see.
The next question may be, “Chris, what do I invest in?” There’s a lot of options out there. I note in the PDF that the boy’s money goes into a Vanguard target retirement account. It’s very easy. We’re talking about a fairly low dollar amount. This is a nice diversification, but I’m not going to get into how to pick those strategies. There’s a ton of information out there that you can use but step three, teach your children how to save and invest.
Start A Business
We’re getting into the advanced topics here. Number four, start a business with your children. Once your children understand the importance of banking, earning money and investing, we’re going to take this to the next level. The first business we started with my children was a jump rope business. This was a few years ago.
I went online. I did some research. You want to look at products that have a demand and are easy for your children to understand. What we did was we bought the supplies. We bought jump ropes unassembled from China for about $2 per unit. The boys assembled those jump ropes. We went to CrossFit gym and almost everybody used a jump rope there. They would come on the weekends, on Saturday mornings. They always would. They’d come with us and would offer jump ropes for sale for $10 apiece.
They were making an $8 profit per jump rope. They’d usually sell 2 to 5 jump ropes in a morning when they would normally be sitting there doing nothing or playing on their iPads. It taught them a few different things, how to identify a need or demand and to put an upfront investment into a business because they had to borrow about $100 from me to get started.
Number three, this is important. I’ve been in sales for certainly my entire adult life. What they learned was they had to communicate with people. They had to communicate the value of what they had and what they were doing. Also, accounting and borrowing. They borrowed that $100 from me. They had to account for their sales and figure out what their profit was. They also got to figure out what their profit was versus what their salary was. What they were getting paid at home and what profit there was.
Financial Success: Your children understand that there’s a value attached to your time, effort, and your business, and you get paid for that.
Let’s take that weekend where they sold five jump ropes. They went home with a $40 profit, split two ways, so they got $20 apiece. That was for less than an hour’s worth of time when they were sitting there playing video games for about 50 minutes of that hour. They walked out of there with $20. We said, “You have a business. You made $20 in one morning. How many days would that have taken you?” The answer is it took them about three weeks to make that in their day-to-day business. That’s a very impactful lesson for children. They understand that they don’t have to go work for somebody to make money. They can create a business with a product that’s in demand and work for themselves.
We’ve gone through four steps of how to teach your children about money and how to turn them into money pros after we’ve become comfortable having those conversations with our children. What is the biggest financial decision the children are going to make as they become adults? Probably the choice of going to college. My boys talk about when they go to college. When they say that, I always ask them, “Why are you going to go to college? What are you going to study?”
In this world, the financial equation of going to college is vastly different than it was years ago. The cost of college was about ten times less than it was when I went to college, then it’s about ten times more. In two generations, we’ve increased the cost of college 100 times. It’s incredible to see how much it’s increased. It’s my opinion that it doesn’t make sense for a lot of children to go to college if they don’t know what they’re going to do or not learn a skill.
There’s a great article that I referenced in the PDF. I tell my boys that they don’t necessarily have to go to college. This may raise some eyebrows out there. It’s not that I don’t want my children to go to college. It’s that I want them to think critically about those choices and I want them to understand the financial ramifications.
My younger son loves Legos, build and cars. He wants to design cars, go to school and be an engineer. That’s his dream. That’s probably a good option for somebody to go to college, learn how to engineer, program, those skills. Although, I don’t know what’s going to change over the next years. He may be able to figure that all out online by that point and design a car before he even gets to college. I’m assuming that that’s a pretty good option.
My older son wants to go to college and play lacrosse. Do I want to pay $50,000 a year for him to go play lacrosse in college? I prefer him to get a scholarship. That would be fantastic. He also is concerned about being a Navy Seal. Perhaps a Naval Academy or an option like that would be a good choice for him, but my point is, there are options outside of college. As a parent, I believe it’s our responsibility to teach our children the ROI, the college’s Return On Investment.
This may not be something you’re comfortable with at this time. This is why I’m having this conversation. You need to be able to understand if you invest $100,000 in a college education, what is the financial value going to be to your child that spends that $100,000, whether that’s the money that you’ve saved or in the form of a college loan, for instance, that they take out. The fact of the matter is we do have the resources for our children to go to college. However, let’s assume it’s going to cost $100,000.
I want my boys to be able to understand if they took the $100,000 and went to school, what dividend, result and return would that yield for them? I also want them to understand if they knew how to invest that money, what would it become? You may be thinking, “Chris, if you go to college, you’re going to make $1 million more on average than that person that didn’t.” College is good at picking winners. Ivy League Schools pick winners, whether they went to college or not.
Financial Success: They now understand that they don’t have to go work for somebody to make money. They can actually create a business with a product that’s in demand and work for themselves.
Some people self-select when they don’t go to college. They decide that that’s not for them and they’re not going to get any value from that. It’s an imperfect system and equation. Here’s why. If you didn’t go to college for those four years, you worked, took that $100,000 and invested it, you would have more than $1 million at the end of your lifetime.
I would argue that most people are worse off financially for going to college. They would be better off spending those four years in an apprenticeship, working, developing a sales skill, learning how to invest, how to buy real estate, creating value and then determining whether it’s worth going back to college at that time. You may be saying, “There are some cultural advantages to going to college.” We can get into some of those nuances, but the bottom line is, I say, “It’s not what you learned in college that makes college worthwhile. It’s what you learn outside of college and class that makes it worthwhile.”
Whatever your family’s choice when it comes to college, make sure you don’t assume that college is the only choice for your children. Be sure you look at all the options out there, all the financial choices. I have a couple of great articles on our blog that talk about how to pay for college using real estate, also how to pay for college without using a 529 plan. Our family personally loves using cash value life insurance for this purpose.
Teaching About Return On Investment
I went through the five different steps of teaching your children to be money pros. 1) Start bank accounts, 2) Pay your children, 3) Teach them about investing, 4) Getting into an advanced level of starting a business, 5) Teach your children how to determine the return on investment. In this case, we’re talking about college. Being a parent is a constant learning process, especially when it comes to a topic as complex as money. Be sure to make money conversations comfortable in your family. By following these five steps, you can be sure that you will be well on your way to raising young money prose.
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I hope you found this episode valuable. I have one more thing to give you. We have a page for my coaching clients where you can get a free copy of my book and much more from previous guests on the show. Check out NextLevelIncome.com/coaching to get a free copy of my book, audiobook and much more. I’ll send you a copy of my book and cover all the shipping costs as a thank you for reading the show. Also, please like, share and take 90 seconds to give us a rating on Apple Podcasts.
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About Chris Larsen
Christopher Larsen is the founder and Managing Partner of Next-Level Income. Since “retiring” after 18 years in the medical device industry he dedicates his time to helping others become financially independent through education and investment opportunities. Chris has been investing in and managing real estate for over 20 years.
While completing his degree in Biomechanical Engineering and M.B.A. in Finance at Virginia Tech, he bought his first single-family rental at age 21. Chris expanded into development, private-lending, buying distressed debt as well as commercial office, and ultimately syndicating multifamily properties. He began syndicating deals in 2016 and has been actively involved in over $500M of real estate acquisitions.
In addition to real estate, Chris has invested in equities, oil & gas, and small business lending, as well as being active in Venture South, one of the nation’s Top 10 Angel Investing groups. Chris lives with his wife and two boys (and Viszla, Lucy!) in Asheville, NC where he loves spending time with them in the outdoors and enjoying the food and culture that the region has to offer.
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