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5 Reasons You Should Only Give A Small Amount Of Money To Your Kids

5 Reasons You Should Only Give A Small Amount Of Money To Your Kids

As parents, most of us want our kids to have nice things, and enjoy the benefits that money can bring.  For many of us, it is very tempting to offer our kids the sort of luxuries we might not have had the opportunity to experience when we were growing up.

Seeing the smile on your son or daughter’s face when you surprise them with the latest toy they have been talking about non-stop, or an excursion they have been dying to go on is a priceless feeling.   Nothing is better than spreading joy to a child.  However, is there such a thing as too much giving?

It’s understandable that parents would like to give the best to their kids, but when treating your children to gifts and surprises too often, potential problems can arise.  This is especially true when it comes to money.  Here are five reasons why you should only give a small amount of money at a time to your kids, even if you’re rich:

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1. Spoiling your kids can lead to poor behavior and attitudes later in life

David Bredehoft argues in his studies on Childhood Overindulgence and Young Adult Dispositions that overindulging your children by giving them too much money, or toys can result in dysfunctional attitudes as they transition into young adulthood.

In his studies, the more spoiled a child was, the more self righteous they were likely to believe themselves to be.  Furthermore, children that had been over indulged tended to see themselves as less effective than the children from other groups.

2. Teaching your kids about wants versus needs

Whenever kids have too much money at a time, it is all too easy for them to satisfy every desire on a whim.  Every child will naturally want the latest toys to come out, like a gaming console, or perhaps the new iPhone that just hit the market.

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This is normal behavior, as constant bombardment by the media practically trains our children to seek out these luxuries.  Because we live in a society that rewards instant gratification, it is important to instill in your kids the differences between wants and needs at a young age, so as to prevent bad spending habits later on in life.

One way put this concept into perspective is by explaining the amount of work required to obtain the money for a specific purchase.  For example, if your child learns that it takes an average of say 30 hours of work to buy a Playstation 4, ask them how willing they would be to work that many hours, on top of the amount of time it takes to pay for things like food and shelter.  This can help them to appreciate the amount of extra work necessary for the luxuries they desire.

3. Giving only small amounts of money imparts big lessons on savings

Building upon the last point, if a child is adamant about wanting something, giving it to them straight away might not be the best decision.

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By setting a weekly allowance, parents can teach big lessons about the importance of savings.  If your child wants a new item, they will have to save up to be able to afford it, which means limiting other purchases.  This will prevent your child from developing the bad financial habit of impulse spending.

Whether or not you require your child to complete chores to receive the allowance is up to you.

4. Kids don’t recognize the actual value of money

With the advent of the digital age, the value of money is becoming less and less recognizable for kids.  With the increased use of credit and debit cards, rare is the case anymore when money is actually changing hands during a purchase.  Without the tangible exchange of paper money, it can often be difficult for kids to realize the significance of the spending that is occurring.

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A recent survey by T. Rowe Price on brandable domain names reports that while 60% of kids say they participate in online shopping, almost 75% rarely, if ever, go to a bank.  This disconnect between the purchases our children are making, and the actual financial institutions that facilitate them is troubling, to say the least.

By making your kids give you real paper money in exchange for the use of your credit card for an online purchase, you can help them to realize the value of the money they are spending.

5. Giving your kids too much money can build the wrong sort of expectations

Giving your kids too much money may be setting them up for failure from the start.  Kids who have constant access to money will quickly become accustomed to a certain sort of lifestyle, and they may continue to expect it as they grow older without ever learning the action necessary to maintain their desired standard of living.

What happens when they are released into adulthood and no longer have an endless supply of money to support them?  Certainly the results are not pretty.  The best strategy is to limit the amount of money your kids have from the start.  This will prevent attitudes of entitlement from ever developing, and limit the false expectation that the gravy train will keep on rolling forever.  Your kids will learn that there is no free ride in the real world, and instill in them a work ethic that will benefit them for the rest of their lives.

Featured photo credit: Spc. Bobby Allen via flickr.com

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Last Updated on September 2, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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