15 lessons rich parents teach their kids
Whether you like money or not, you will be talking and thinking about it all your life. Making money mistakes at a young age can be costly, and these mistakes can follow you for the rest of your life.
Although money is important, we don’t hear much about it growing up. Most parents don’t teach their kids about money, so they do not teach them the lessons they should.
In this post, I will share with you 15 lessons rich parents teach their kids and how these lessons can totally transform our personal finances.
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1. If you can’t pay for it now, you shouldn’t buy it
One of the worst habits I developed when I started working was shopping online and paying by invoice. I was an intern at the time and only made about $1000 a month.
I still lived with my parents, so I didn’t have rent or high bills to pay. I had no credit cards and no time to go shopping. So I used to do my shopping online and paid for everything by invoice.
The problem when you delay the payment of your purchases is that you tend to spend more. You would have spent much less if you went into a store and paid cash.
This is a bad habit and is often the beginning of problematic behavior, leading to more debt. So, avoiding delaying the payment of purchases and paying things in cash as much as possible is a great money lesson I wish I had been told as a young adult.
2. Have a separate bank account for your savings
This advice may seem obvious, but you may not realize the importance of having multiple bank accounts when you don’t make much money.
When I first started working, I just figured I’d pay my bills, and the money I had left in my account would be used to cover any unexpected expenses.
At the end of the month, the money left in my account would add to my next paycheck, and I thought I would accumulate wealth from one month to another.
In reality, it doesn’t happen like that, especially when you’re young. Believe me, the chances are that you will be spending the money you have on your account, and you will be left with very little to no money at the end of the month.
Having discipline with money is complicated when you’re young. This is why you should always think about saving and have a separate bank account for your savings.
3. No matter how much you earn, start saving
This is tip is probably one of the most important money lessons young adults should know about. As a young adult, I only knew very few people who saved money regularly.
No matter how much you earn, save a little. You don’t have to save 20, 30, or 50% of your income. If you have a low income, it will probably be impossible.
Saving 5% is already a good start. Of course, if you can save more, do it. Just don’t wait until you earn more to start saving.
I’ve been telling myself that for many years. I just thought that I would earn more later and, therefore, I would be able to save more easily. Of course, that’s true.
However, if I had saved a small percentage of my salary early in my career, I would have spent less money on trivia and accumulated a nice amount in savings.
4. Avoid Lifestyle Inflation
This is another mistake I am guilty of. This one is actually so common that it is in all good economics books.
Human beings tend to raise their standards as they earn more money. This is generally referred to as the “marginal propensity to consume.”
If the marginal propensity to consume is estimated at 0.8, this means that the average person spends 80 cents for every dollar earned, and the remaining 20 cents are saved.
So, to make a long story short, when our income increases, our spending also tends to increase. It is a psychological effect.
You spend more because you can afford it, and you end up saving less. This is also why some people cannot save any money despite having high salaries.
This is a common mistake you should be aware of and avoid.
5. Develop a good money mindset
This point may be the most complicated to follow, but it is imperative. It may even be the most important point on this list.
Indeed, your behavior towards money will have a significant impact on your financial health. Are you the type of person who likes to see money accumulate in your bank account?
Or do you spend your money to overcome bad emotions? I used to be this kind of person until I was tired of being stressed by money.
What helped me change my money mindset was looking at all the clutter in my apartment and realizing that these things were once money in my pocket.
My money mindset then changed because I realized that seeing my bank account grow was much more satisfying than the excitement of buying new things.
Another simple way to change your money mindset is to read books on personal finances. Books are an amazing way to improve your financial education.
If you are looking for great books to educate yourself about money, here are my favorite ones:
- The Intelligent Investor by Jason Zweig
- Broke Millennial Takes On Investing by Erin Lowry
- I Will Teach You to Be Rich by Ramit Sethi
- The Psychology of Money by Morgan Housel
- Rich Dad Poor Dad by Robert T. Kiyosaki
- The Total Money Makeover by Dave Ramsey
- The Millionaire Next Door by Thomas J. Stanley
- Money: Master the Game by Tony Robbins
- The Richest Man in Babylon by George S. Clason
- The 4-Hour Work Week by Timothy Ferriss
Related read: 20 Money Mindset Shifts From The New Rich
6. Have a budget
My parents never had a budget. So I didn’t grow up with the habit of tracking my expenses. However, if you have read my other posts on the subject, you know how important it is to have a budget.
As explained here, It’s a quick and easy way to know exactly how much money you make and where that money goes.
Having a budget is also essential for determining how much you can save and setting goals. So guess what? That’s the next tip!
Related read: How to Create a Budget you can stick to
7. Set Financial goals to motivate yourself
Setting goals is essential to stay motivated and keep saving. Saving to have more money is good. But if you have a clear goal in mind, such as buying a house or going to university without debt, you’ll be even more motivated to save.
It will be worth the small sacrifice, and you’ll be even prouder of yourself once you have reached your goal.
So set short-term, mid-term, and long-term goals, write them down and do the math to determine how long it will take you to reach these goals.
8. Have an Emergency Fund
When I lived with my parents, I didn’t realize that unexpected expenses often come up, especially if you are poor at financial planning. I didn’t know this until I moved into my apartment and saw the various insurance bills piling up.
I had to split these payments into several monthly installments. I could have paid them all at once if I had planned for them before I moved in.
It is generally recommended to have the equivalent of 6 months of living expenses in a separate account.
You can dip into this emergency fund if you lose your job or if a significant unexpected expense comes up. This prevents you from accumulating debt and allows you to cope without worrying too much.
9. Think about Insurance
Having good insurance is part of financial planning. In case of unemployment, illness, or even death, you will save yourself and your family a lot of trouble if you have taken out insurance.
Health insurance and insurance for your car and home is a bare minimum. In many countries, these insurances are mandatory. In case of misfortune, being insured will save you many sleepless nights.
You should also consider taking out life insurance. This is a subject that people, especially young people, don’t like to hear about.
The loss of a loved one is always tough. At such times, money should be the last thing in our minds. Unfortunately, in these situations, bills quickly add up.
They are many different insurance providers, and all of them offer different products. Make sure the one you choose is adapted to your situation.
As explained in my post on how to boost your personal finances, don’t hesitate to seek the help of a professional advisor. Insurance policies are complicated, so seeking professional help can save you a lot of money and ensure that your insurance coverage is right for you.
10. Know your Net Worth
Financial health includes two perspectives. We already discussed the first one about the importance of having a budget.
Having a budget will give you an idea of your financial health month after month. When making financial decisions, you should always consider your budget and also your net worth.
You need to look at the big picture. When making new financial decisions, always consider their impacts on your net worth. This will help you figure out if this decision will have long-term positive effects on your wealth.
To know your net worth, subtract your liabilities from your assets. Keep an eye on it and do the math regularly to see if you are accumulating wealth or if your decisions harm your financial health.
11. Pay off Debt
If you want to do yourself a favor, you should avoid debt as much as possible.
Nevertheless, you must remain realistic and understand that you will have no choice but to take out a loan in certain situations. And that’s okay. It’s not a big deal as long as it is financing an asset that will allow you to earn money or accumulate wealth.
If you need a car to go to work but don’t have one and can’t afford to pay cash for it, take out a loan.
The important thing is to do it smartly:
Set a reasonable monthly payment and term for your loan. If your car should last you three years, your credit period should not exceed three years. This is a basic rule of thumb.
Your loan repayment should never be longer than the period of use of the good it finances. Compare the offers of the different banks and make sure you take the one with the lowest interest rate.
Another essential thing to remember is not to buy a brand-new car. New cars lose 30% of their value within the first year and then 20% per year! Buying a new car is rarely a good investment.
You will save a lot of money by purchasing a two or three-year-old car. Don’t buy an overpriced car just for the brand. Finally, look for the best deal from different sellers.
If getting into debt is okay in certain situations, paying it off as quickly as possible should always be one of your priorities. There are two methods usually recommended to pay off debt. These are called the avalanche and the snowball method.
To learn more about paying off debt, do not hesitate to read my post on the ten steps to follow to get out of debt. Being debt-free is the first step to financial freedom, so take the necessary time to analyze your situation and plan to pay off debt.
12. Save for Taxes
Another mistake I was guilty of was not saving to pay taxes.
This was especially true during the first year I worked. In Switzerland, the first tax estimates come in about a year and a half after you start working.
I was so happy to finally have a salary that I spent a lot. I didn’t save and thought putting money aside for my taxes was unnecessary. After all, I would have almost two years to do it!
Taxes represent about 1.5 to 2 monthly incomes in Switzerland. The first time I received my statement, I had to ask for installment payments, and I fell behind on the following year’s taxes. This was a bad financial decision.
13. Think about Retirement
Saving for retirement is one of the first things you should consider when you start working. To start saving for retirement, you need to create your budget and define how much money you can save. You also have to decide on what type of account you want to save.
Again, young people often don’t want to hear about saving for retirement. This is a mistake because if you start saving for retirement at age 25, you should “only” save 15% of your monthly income from accumulating enough funds to retire serenely.
If you start at age 35, you will have to save 23% of your monthly income! In addition, the earlier you start saving, the more money you will make, thanks to compound interest.
14. Decide to be Rich
If you want to be rich, you must have the right mindset.
You need to understand that you are doing your future self a favor by saving money. You need to realize that having money in the bank and forgetting about payday will be more rewarding than buying the latest iPhone or Mercedes.
This advice is hard to follow when everyone around you has the latest cellphone, computer, or car. But the freedom that money will give you will be much more rewarding. Believe me.
15. Start Investing
Starting to invest is important to build wealth. In my opinion, you should first be debt-free and have enough money in your emergency fund before starting to invest.
The investment possibilities and theories are infinite. We won’t talk about them here, but here are two rules of thumb. If you consider investing for the first time: find a trustworthy platform and only invest money you can afford to lose.
Now, if you are ready to invest and start making real money, please consider asking for professional advice first. It can save you a lot of trouble.
Living by these 15 money lessons will help you take your finances to the next level. If you have never given some serious thought to your personal finances, implementing all the tips above might seem overwhelming.
But you don’t have to feel this way.
Start by implementing one tip at a time; things will rapidly seem much more achievable. Personal finance doesn’t have to be hard.
All it takes is the right advice and simple tools to help you turn your finances around. If you don’t know where to start, download my free personal finance resource below.
It contains everything you need to create your budget, pay off debt faster and build your emergency fund!
Insurance is such an important one! You need it before you need it!
Yes, exactly. Having good insurance is so important!