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Families And Financial Education

Getting a financial education is just as important as getting an elementary thru college education. Unfortunately, our school systems do not teach basic financial education. After a solid foundation, understanding financial products and how they assist in the creation of wealth is an essential component in your family's financial education.Learning about financial products like stocks, bonds, mutual funds and real estate will arm even young investors with the resources they need to create their own wealth based on the financial education they receive at home. Before inundating your family with these financial products, provide them with that solid foundation of basic financial strategies.Review how to properly manage a checking account and a savings account. Teach them the proper use of credit cards. Show them the difference between good debt and bad debt. Understand the rule of 72 and compounding interest, when it works for you and when it is against you. Work with a budget and ensure each family member can stay within and maintain the budget.Start your children off with savings accounts, how deposits are made and how interest is earned. As they grow older, usually in their early teens, they can begin learning to manage a checking account. Show them how to make deposits, write checks, and most importantly, properly balance the checkbook. When you feel they are ready, help them open their own checking or savings account. One they can use for the money they earn as an employee of your home business.Next they will need to learn about credit cards and good and bad debt. Credit cards can be a very useful financial tool if used properly. Buying on a whim with a credit card to get the instant gratification is not good debt management. The buy now, pay later mentality only creates bigger problems down the road and instills bad habits in your children. Credit cards are useful only if the balance is paid off each month. If this is hard to manage, consider using a secured or prepaid card that carries a low balance, $500 to $1000.Carrying a balance on a credit is an example of bad debt and of how compounding interest works against you. Making the minimum payment on just a $5000 balance can take almost 30 years to pay off and costs thousands more in interest charges. Using debt to buy an investment property that has an income stream is an example of good debt. Let someone else pay for your debt.Teaching your family the rule of 72 is a good way to help them understand the value of interest that works for you. This rule works by dividing 72 by the interest rate of your investment to see how many years it will take to double your money. 72 divided by 8% equals 9 years, 72 divided by 15% equals 4.8 years. Thus the better your interest rate, the faster you will double your money.Working with a budget will help your family develop financial discipline. Start your children off with a portion of the budget, like the weekly food allowance. Have them plan the menu, shop for the food and make adjustments to the purchases to stay within the budget. Show them how having some money left over each week can be put into a fund for some future larger purchase. It is far better to save first and then buy thus avoiding the finance charges associated with paying over time. Instead of instant gratification, they have the satisfaction of knowing the things they have are paid for.Once your family has learned these basics, then you can begin to teach them about the more sophisticated financial products. Stocks, bonds, mutual funds and real estate each have their own set of rules to utilize them properly. A thorough understanding of each is needed to create a well-balanced portfolio. Constant effort is needed to help your family receive the financial education that is not available in our schools. Giving them this education will provide them with the knowledge they need to create their own wealth in the future.

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