I have read a lot about improving finances because I believe that it is an important skill to have in today’s world. I am self-educated when it comes to finances because in school, we hardly learned anything about managing money. One aspect of schooling that I think needs to be changed is this lack of a financial education. People can end up in terrible situations because they don’t know how to manage their money.
A great way to build a strong financial foundation is to distribute your earnings into separate accounts. From several different financial and investing books that I have read, I have developed my own financial system that works for me and I encourage you to implement something similar to this with your child to build a solid financial foundation.
I’m going to call it the Fifty and Five Tens. Every time I get a paycheck I distribute my money into six different accounts, which I keep on an Excel spreadsheet. Other financial plans similar to this advocate putting money in separate accounts at a bank, or putting the money in jars in your room. I use a spreadsheet because I feel more organized when I do it that way and it’s easy to distribute the money that I earn and the money that I spend.
- The 1st account (50%), the largest one, is for necessities. You determine what those necessities are, but I go with food, shelter and clothing.
- The 2nd account (10%) is your investing account. This is the most important account because it builds a strong financial foundation by having your money work for you (I will talk about the best ways to invest money for your child in later posts).
- The 3rd account (10%) is for long-term investments. I personally use this to make payments for my truck, but you can use it for any large investment or major purchase.
- The 4th account (10%) is for education. One of the smartest things we all can do is invest in ourselves.
- The 5th account (10%) is for fun. Everyone needs to go out and enjoy life, but in order to be secure in the future the amount of money you spend on fun should be considered. Ten percent of your income on fun activities is a good rule of thumb.
- The 6th account (10%) is for giving. I use this account for a variety of different things, but one of my biggest expenses is buying gifts for others on special occasions, whether it be birthdays, weddings, or holidays. So, I have devoted ten percent of my income towards those endeavors.
The financial management plan that I use is meant to be flexible. I don’t always stay within the guidelines that I have set for myself because when life happens it’s nearly impossible to do so. But, I do have an understanding of where my money is going, where I am wasting money and I have a plan in place to develop assets where my money will work for me.
It is important to give your child a strong financial foundation. The plan I suggested is simply a suggestion and something that I use personally. The type of financial plan you assist your child in using is not of the utmost importance, but what is important is getting your child to think responsibly about money. The earlier they understand how money works and how to get their money to work for them, the better off they will be in the future.