Life relies on cost-benefit analyses. Sometimes, maybe usually, parents distill the useful lessons too much. A child is taught the summary of a lesson but the fabric is missing. In those cases, the cost is usually visible and the benefit not. Sometimes the other way around. Those are poor lesson.
Consider the value of saving. Parents teach saving hopefully to have the child learn self control and minimize thoughtless impulse spending. The future value is invisible while the cost is right in their face. For most children the saving idea is mitigated by instinct. The summary of that instinct is, “Saving pays off tomorrow. Spending pays off today.” If you want to teach saving, you must teach time competence too.
Time competence means to value the past, the future and the present appropriately. We learn from the past, we experience only the present and we expect to live our lives in the future. If we save today to no known future purpose, we will tend to under-save. If we value the future too highly we will over-save and miss out on many pleasurable things in the present. If we overspent in the past, the debt will minimize the use of current income for either pleasure or for saving.
The connecting insight is that money is the fuel for a time machine. We spend only in the present. Debt payments are money we send to the past to balance the spending we did in that long ago present. Saving and investment is the transfer of spending to the future. Misunderstanding how money works makes the idea of saving difficult to understand.
Money has no inherent value. Money is how you exchange some value you supplied for some other value you want now. I worked last week and was paid for time and skill. I used some of the money to go out for dinner. The deal is my time and skill for the dinner experience. The money just makes it easier.
Saving moves the exchange further into the future. If I, as a saver, realize that the saving today is some spending I would like in the future, I will have little problem with it. If I further come to realize that time machines make money bigger as it moves to the future, I might actually prefer saving to spending.
Teach children what money is for. Teach them to have goals for the future that saving will support. Teach them that money provides flexibility. Teach them that the goal of saving is to have resources to help them get what they want in the future. They cannot get everything today so the future matters.
Making saving an attractive activity requires the payback of a better life in the future. Be sure the child can spend some of their savings when the time is right. If they cannot, they will never see the payback from saving and investing.
Saving and spending are connected ideas. Learning to spend well is an important part of financial literacy.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772