Your Life Simplified

How to Help Your Kids Be Financially Literate

June 2, 2022

How can you help kids learn how to handle money and be financially literate? In this episode, Valerie Escobar and Mike MacKelvie will be sharing with you tips and insights to help you teach your kids how to become financially literate and have a good relationship with money at each stage.


Mike MacKelvie: There’s this moment in every class where I get eyeballs. As a speaker, you’re always paying attention to when people are paying attention to you—those little pockets of stillness. And I find there’s this pocket of stillness, where even the kids sitting in the back with headphones and have been looking at their desks the whole time, they perk up, they find interest.

So, there’s this big, big topic today of how do we get kids to make better decisions with money, this conversation of financial literacy. So, I want to share some insights in how I get kids to that point, specifically that example, so that you can take those insights and share them with your kids or just maybe use this example with them.

So today, I’m joined by Valerie Escobar, who does have kids. She’s a Certified Financial Planner. My name’s Michael MacKelvie. I’m a Certified Financial Planner. Valerie?

Valerie Escobar: Good to see you, Michael. And thanks for everyone joining us today at Your Life Simplified.

I do have kids. My 9-year-old is especially entrepreneurial. He has a business, a business that is named, Butt Cheek Bomb Services. And they have a couple lines of services. The first is lawn services.

Mike: I’m interested.

Valerie: Don’t understand how it works, but there’s a lot of explosions involved. And the second line of services is the sale of F-15 farter jets. And I will let you imagine how these jets are fueled, propelled forward.

I use that entrepreneurial spirit a little bit differently to help direct his relationship with money. We can earn money by doing things that don’t involve explosives at this point. For example, to pick up sticks around the yard or take the trash out, et cetera. The job itself is not as important as the transaction that happens afterwards.

With kids, they tend to be visual. They learn so early, so much earlier than you would ever imagine. I remember starting out with just coins. Let’s say that you earned a dollar, 10 dimes for doing X, Y, Z. One of the things that our relationship with money to remember is that we don’t actually get to keep it all. The government’s going to get some of it. We owe somebody some money. There’s all sorts of different things. From an early stage, splitting that up and saying, “Okay, 10% or one dime is going to go towards long-term savings. Another dime is going to go to giving. And then I get to spend the rest of these dimes.” I think that putting that in their minds pretty early, that we’re going to split this up, is a good habit to form.

Mike: Yeah, absolutely. Obviously, the mental accounting, there’s these things that just get discounted. Again, “Oh, we understand what mental accounting is, so it must be easy.” Again, we’ve always had this conversation about simple and easy. It’s not easy for adults to do that at times. So I think that’s a great point, getting people, obviously, in the habit of, just kids in this case, of just mentally accounting for, “Hey, what bucket is this going in?”

Valerie: Absolutely. Yeah. You made the point of it being a mental thing. I think a lot of adults, even today, that they’ll say, “Oh, I know how much money is in my account. I know how much money is there.” But then, they don’t. All of a sudden, their credit card bills are way up there.

Mike: Literally don’t know where it is.

Valerie: That’s the other piece that I try to emphasize, too, is we use an app now. My youngest is nine now. We use an app that helps with electronic payments. I can electronically pay him and put it into these different buckets. Then he gets to look at the app and say, “Oh, this is the balance that I have in these different buckets.”

One of those big things that we’re aiming for, even though he is nine, is a car purchase, several years in the future. When we’re looking at really big purchases, the toughest thing to do is to arrive at that point, you’re 16, and you realize, “I need $6,000 to buy a car. How the heck am I going to do this? I have nothing to start with.” If we’ve started a long time in the past and have, say, there’s a small bucket that’s already formed, the task just feels much more attainable.

Mike: Yeah. You break down any of those large decisions into the minutiae, and you can find that minutiae in every day. But even just, I think, a thousand dollars is just over a little, I think, it’s a little over $2 a day. It’s roughly $2 to $3 a day, which in this case, if you’re starting with your 9-year-old, then, historically, they start driving at 16. That would be on pace for it. That’s easy to break it down to that. It’s a great point.

Valerie: Absolutely, yeah. Once they’re starting to get to that point, another part that I really like to emphasize, and that is somewhat surprising, is that the understanding of credit and credit cards is something that is not just, like all of finance, it’s just not an obvious given thing. So getting kids started on credit cards pretty much as soon as possible is pretty important, not because you obviously want to give them a line of credit to just go crazy at it. But because they need to understand that there is a ledger out there, that’s what you bring in has to be paid off. Understanding what that relationship is, and not only that, building credit is such a huge, impactful thing, even if you’re somebody that, “I make a good income. I don’t owe anybody any money. I never have. And I want to buy this house.” The bank’s like, “Great.” You’re not going to get that house.

Mike: Yeah. This is where building credit is incredibly important. Again, it’s just something that I think if we can have more experience before maybe just a large decision around credit, maybe a car, financing a giant, big loan for a car or financing your college, in this case, obviously those little repetitions can help.

Valerie: Absolutely. Yeah, and just understanding that there is a discipline involved in saying, “Okay, if I have a strategy in place that I’m going to buy my credit or… My phone bill every month is going to come to my credit card, and then at the end of the month, I pay it off.” Then I understand, or you teach your kids, that way, you don’t owe any interest expense. That repetition each month is going to prove to the credit agencies that I am a good risk, and that’ll allow us to have lower interest rates.

Interest rates are also another really important thing to teach, to talk to kids about. That can work against us, and they can work for us. When it comes to debt, you want the lowest rate. On teaching kids about how to get a good reasonable rate of return or credit rate is important. Obviously, the rate of return on investments is another piece, but that’s another stepping-stone to get into that piece.

Mike: Yeah. Credit is again, it’s an interesting step because it is obviously a step of… Just about everybody’s financial progression is building credit and having to deal with it in some way. But we know that so many people struggle with it that there’s a form of entrapment that can exist there, because you’re given money, in a sense, that you don’t have. That’s where it can be troubling. But for people that are able to, again, build a good relationship with it and understand this isn’t, obviously, money that I owe, and they pay it off each month. It’s very beneficial in the long run in the form of good debt, which is, in a lot of different ways, maybe real estate or something else.

I mentioned early on that example that I share with high school kids that gets to this point of stillness. If you want to share this with your kids, that’s great. But I want you to think real quick of having… We’re going to have two different savers. This is the exact example that I give in classrooms. We have two different savers. We’re going to go back in time, Valerie, to 1972. We’re going to use historical data for this, but we have two different savers.

The first is John. We’re going to use Sam as well, but John… Now, do you think most people wait with saving, or do you think they get going early?

Valerie: Oh, definitely.

Mike: Obviously, all the kids, everybody, they’re going to give a resounding, “Well, they wait.” John’s not a bad guy. He’s a good dude, but let’s just say that he waits 10 years to start saving. He waits, in this case, he’s 17, and let’s say he waits until he’s 27. We’re going to start saving with John in 1982 in this case. He’s going to save for 40 years, $100 a month, that’s $1,200 a year. Again, we’re talking to teenagers here. This sounds, obviously, a little bit larger. That’s $1,200 a year for 40 years. Does this all the way to 2021. That’s $48,000 that John has saved.

How much, if this money was invested in the S&P 500, which is the largest 500… Just think of it like the biggest, baddest 500 companies. So you don’t have to pick and choose different stocks. Let’s just say you kept it simple and just said, “Hey, I want to invest in the largest 500 companies.” There’s a lot of funds that do this for you. It’s quite simple. John does that for 40 years, 48,000. He saves it into the S&P 500. He comes back in 2021. He would have over $900,000. He’d have $905,475. That’s not bad. John’s almost a millionaire.

And again, I have yet to have one kid even guess in the ballpark of this. They look at a $48,000 number, and they say, “Oh, maybe, 150, 200.” A lot of adults too would obviously look at that and be like, “Wow.” This compound effect is mesmerizing.

But let’s just say we continue the example. We got Sam here next. So Sam, she says, “I’m going to save the first 10 years, and then I’m going to be done.” So we’re going to flip-flop the savings. She’s going to save the first 10, and then she’s not going to save for the next 40. She’s going to save $12,000 total, a hundred bucks a month, till she’s 27 years old, in this case to 1981. So 1972 to 1981, 10 years, $12,000 that she saved.

How much money would she have 50 years later from when she started? She’s only saving the first 10. She’s saving 12,000, John saved 48.

She would have $2,063,923. She saved roughly $12,000, and that turned into over $2 million. She saved one-fourth the amount as John. Again, John’s not a bad guy. But she saved one-fourth the amount as John and had over twice as much.

Now you might look at this, you might say, “That’s great. That’s awesome, Mike. But I’m 17 freaking years old. I don’t have $1,200 a year to save.”

One last magic trick. $1,200 a year is $3.28 a day. If you can come up with one after-tax five-layer burrito from Taco Bell a day in savings, if you can set that aside, that could be worth over $2 million to your future self.

Valerie: Absolutely. And your intestines will be so much happier, too.

Mike: Yeah. You hear that and again, yeah, this is where I see hands. People are trying to piece together. They’re like, “Wait. What? So what happened? What’s going on?”

When you see that curiosity, it’s an obvious interest. And I mentioned, all different kids are perking up, asking questions at this point in time. But there’s one last step that I take. Let’s say you listen to this example today, and you’re like, “That’s great. But it’s Friday, which means tomorrow’s Saturday. And I’m excited about Saturday.” So you maybe skip out of this class, and you just forget about it for a year.

Let’s just say Sam skipped out of the class. She’s like, “That’s great. But I don’t really want to get going for a year.” For whatever reason, she waits a year. That costs Sam over $235,000. She would have $235,000 less than that $2 million number we mentioned if she waited one year.

This compound effect value, it goes both ways. It can go up, but obviously it can go the other way, too. This conversation of how do we get going, breaking things down into bite-size pieces, literally in this case, the after-tax five-layer burrito of savings each day. It’s a wonderful compound effect.

But again, there’s risk to paralysis in not doing something. So the last thing I say to these kids, every single time, “What’s one action item for you today, one thing that you can do, whether it’s setting up an automatic transfer, whether it’s just setting up your checking and savings? What is the first step, you walk out of this class today, that you know you can do, one small thing, because we got some flaws? What’s one thing you can do?”

It’s pretty special because even this past week, I get emails from kids that will go to the teacher, follow up, or they’ll come up after class. They’re a week down the road, and they’re just asking me random questions. “Hey, I’m going in the Marines. I’m not really sure what I should be doing and getting going. What should I do with that type of income if I’m not going to be going to college?” “Hey, if I am going to college…” All different types of questions. “Is University of Oregon different than UCSD? Would an employer look at that differently?” And I’m staring at it. It’s a $54,000 cost difference a year. Kids are just curious about these questions.

But I find that what seems to move kids more than anything is just breaking it down to that minutiae within the day and illustrating that wonderful compound effect. That compound effect is bright when you are a kid, because you got time, Valerie.

Valerie: Absolutely.

Mike: This can be applied not just for savings, but for everything. It really can be if you break it down. We talk about this big financial choice that a lot of kids have: college. And Valerie was quick to say, “Hey, one of the things…” Before this, she said, “One of the things I think it’s worth talking about is having some form of ownership for the kid in the college expense.” And I couldn’t agree more.

How do you have that conversation? What are some things you can do? Also, if your kid does just have to take part in this cost, what are some things you can do? One of the things I like to illustrate is the true cost of the student loan.

You go on these loan calculators, it’s fascinating to say, “Hey, here’s your interest cost.” You take this loan out. Over 10 years, you got a $9,000 interest cost. You think, “Oh, that’s my cost with a loan.” It’s not. There’s an opportunity cost there, because if you’re making those loan repayments, that takes away from your ability to save.

I just have another piece that I share with kids, a very similar compound effect, where we look at that cost, but then we break it down. We say, “Okay, what can we do to fight this loan?” You know, $10,000 a year in student loans is roughly $27 a day. If you can find $27 a day as a kid, that’s worth $10,000 of loans a year, which is roughly about the average student loan that someone’s graduating with right now. It’s around $38,000 after four years.

There’s all these little things that kids can do. But I always find what’s best is starting with just one action item, showing them this compound effect and say, “Hey, what’s one thing you know you can do? We all got some flaws. What’s one thing? I’m going to write something down. What’s one thing you know you can do?”

Valerie: Absolutely.

Mike: Anyways. I don’t know. For you, Valerie, do you find, similar action items maybe with your child? I guess, what’s your experience with that?

Valerie: Absolutely, yeah. We try to focus on one topic at a time, and I think the college conversation can be tough just because at that age, you’re trying to make a lifelong decision with very limited life experience.

But one of the aspects that I like to focus on is correlating that actual career, the future career, with the student debt or the cost and understanding-

Mike: Yeah. That’s a great one.

Valerie: “The vocation I choose is going to have an income related to it. And then there’s a student debt that’s related to that.” Do they correlate?

Sometimes it’s thought that you go to school regardless, even if that’s not really the passion of the child. I have a sister that is a hair stylist, and she never went to… She didn’t get a bachelor’s degree. But her income is amazing. She gets a great income, and she doesn’t have the student debt to deal with.

Just looking at things at different ways and having those conversations and really involving children in money, I think, is very important. I think a lot of us want to protect our kids from these tough decisions and thoughts. “Money’s so stressful. You get to be a kid and grow up and think about it.” But if we can have these conversations a little bit at a time, throughout their lives, then money’s not scary anymore. Or it’s always a little bit scary, but it’s much more approachable and consumable.

Mike: Yeah. When you face the dragon, it’s a little bit less scary. With anything, and there’s this thought… You touched on something really important there of, “Well, I’m maybe just not interested in finance.” One of the questions I always ask the kids, “Do you see financial planning more as a responsibility or more as an interest?” They always overwhelmingly say, “Well, responsibility.”

And I say, “Yeah, responsibilities kind of suck, don’t they? But if you think about it, I don’t really enjoy brushing my teeth. I’m not relishing every stroke of the brush when I’m doing it. But the idea of any responsibility is you’re bargaining with your future self. You’re saying, ‘I’m going to do something today for a lot less pain tomorrow.’” Assume you get to have what you want. You can definitely go down the road of just not having interest with money, just not doing much as far as just building a responsibility, building a good relationship with it.

Unfortunately, it’s like brushing your teeth. You’re going to wind up in a pretty painful place at some point in time. The odds are stacked against you if you just say, “I’m not going to change the oil on my car for 30, 40, 50 years.” See how far you get.

So it’s responsibility. We hate that word. It’s parental. But again, the way responsibilities work is it just diminishes that pain. It’s just, “Hey, my future self doesn’t have to deal with this. And in fact, it can actually lead to a place of more freedom, oddly enough.”

Valerie: Well, thank you for sharing all that. And I’ll have you come over and give my son the toothbrushing lecture. He might…

Mike: Yeah. Again, that doesn’t mean that it’s easy. It’s not easy. That’s where it’s this idea of, yeah, we got to monitor it and just have that vulnerability to understand it’s not going to consistently be easy, but it’s responsibility that we own at the end of the day. We have our own relationships with these responsibilities. We have to obviously follow through them or again, we barely bear our own consequences there.

Hope that was helpful. Again, if you’re listening to this, make sure to hit that Subscribe button to follow along for more content from industry professionals like myself and Valerie here at Mariner. Whatever platform you might be listening to, make sure to hit that Subscribe button.

Thank you, and take care. Have a wonderful week.

Valerie: Thanks, everybody. Join us next time.

The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation.

The investment return scenarios are for illustration purposes only and do not illustrate actual investment results. The calculations are based on the S&P 500 Index, which cannot be directly invested in, and the past performance of the index does not guarantee future results. The actual return rate largely depends on the types of investments you select. The determinations made by this example are not guarantees or projections, and no taxes or fees/expenses are included in the calculations, reducing the figures shown.

It is important to remember that these scenarios are hypothetical, that future rates of return can’t be predicted with certainty, and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. For additional information, please contact Mariner Wealth Advisors.

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