What should be your child’s first lesson about Financial Literacy (money management)?

Question  What should be your child’s first lesson about Financial Literacy (money management)?

Answer  How to save money.

Complete Answer  A basic assumption of Financial Literacy (money management) is “Don’t buy stuff if you don’t have the money to pay for it”. Most children know that instinctively. Unfortunately some adults who find themselves in financial difficulty seemed to have forgotten that basic assumption of Financial Literacy.

A child’s first lesson in Financial Literacy is how to save money. It’s called “Pay Yourself First” (PYF Savings). Every time a child has money to spend, a birthday gift, money earned for raking a neighbor’s yard, et cetera, 10% should be saved. This should be automatic and nonnegotiable.

Although these concepts are beyond the understanding of a child, in the future the PYF Saving account could be used as a rainy-day fund, a child’s personal bank to borrow money from, and eventually a retirement account.

Financial Literacy Knowledge/Skill

Teach your child how to save money using the concept of  “Pay Yourself First”.

Comments or Questions

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How much money should you be saving?

Question How much money should you be saving?

Answer  Ten percent of your take-home pay.

Complete Answer  At the very minimum, you should be saving 10% of your take-home pay.

The 10% Affect  Saving 10% of your take-home pay may seem like an impossible task. It is if you try to do it all at once. If you do it one pay check/one purchase at a time, it’s not that difficult. I like to think of it as, “Small change equals big bucks.” For example, If you have $10 to spend on lunch, how different would your lunch be if you only spent $9? Instead of spending $100 for clothes, you only spent $90. Could you really notice the difference? That’s “small change”. If you do that for a year, you will have saved 10% of your take-home pay, that’s “big bucks”.

Financial Literacy Knowledge/Skill

Save 10% of your take-home pay.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How should you be using your savings?

How do you save money?

Question  How do you save money?

Answer  If you spend less money than you take home, live below your means, you will have money to save.

Complete Answer  There are many ways to save money, every thing from putting your spare change in a piggy bank each day to money automatically deducted from your pay and put into diversified investments. Do what ever works for you. The important things to remember are:

  1. Start right now! Albert Einstein said, “Compound interest (earning interest on interest) is the eighth wonder of the world. He who understands it, earns it . . . he who doesn’t . . . pays it”9. For example Adam and Alice agree to save $10,000.00 each for retirement which is 30 years away. Alice started right now by investing her $10,000.00. It took Adam ten years to save the $10,000.00 to invest in his retirement. Even though both invested $10,000.00 for retirement, in 30 years, Alice will have $24,568.42. Adam, because he waited ten years to invest his money, will have $18,207.55. They both saved $10,000.00 for retirement. But because Alice was earning interest on interest (compounding) she will have $6,360.87 more than Adam. For this example the interest rate is 3% compounded monthly.
  2. Make savings a priority. The first thing in my Spending Plan is savings. Each month I begin by saving 10% of my take-home pay. That financial literacy concept is called “Paying Yourself First”.
  3. Make it easy. If a task is inconvenient or cumbersome, it’s easy to put off or skip it altogether. Have part of your pay directly deposited to a savings account, have money automatically transferred from checking to savings each month, round up purchases to the next even dollar and then leave that amount in your checking account, or putting your spare change in a piggy bank at the end of each day are just a few ways to save money.

Misconception  A common misconception about saving is some people believe or are led to believe that buying something on sale is saving money. Some people go so far as to believe that buying something on sale is actually investing money. Both concepts are incorrect. When you buy something on sale, you are simply spending less money.

Financial Literacy Knowledge/Skill

Saving money begins with living below your means, make it a priority, make it easy to do, and begin saving now.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How much money should you be saving?

Is saving money important?

Question  Is saving money important?

Answer  YES!

Complete Answer  Without savings;

  • You are living paycheck to paycheck. Any interruption in your regular paycheck, such as a sudden illness, a cut in your work schedule, a temporary layoff,  will cause your finances to quickly spiral downward.
  • You don’t have money for a financial emergency expense.
  • You cannot afford big ticket items (down payment on a house or a car, purchase of a washer/dryer, furniture, et ectera).
  • There is no possibility of a comfortable retirement in your future.
  • Most disheartening of all, at the end of another year,  you have nothing to show for a year’s worth of work.

Financial Literacy Knowledge/Skill

Understand that savings is an important element of your financial literacy.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you save money?