Many Americans, as well as people across the globe, quickly realized what they were missing when the virus hit: an emergency fund.
Financial advisors recommend socking away 3-6 months (I would argue skewing towards 6 months, at least) of your income into a savings account in case money is needed immediately, or to stretch out over times of no paychecks. COVID-19 has taught us how quickly life, employment, and income can change. Kids can be shown (by example, ideally) that emergency funds can carry the household through rough financial patches. Without an emergency fund, families can go into debt, be late paying bills, and even run low on necessities. Parents can begin teaching this early on.
If children are used to having an emergency fund – even it is mostly dimes and nickels- it can become a habit that carries with them throughout their lives.
Besides the emergency fund, I try to constantly keep and maintain a budget, and share the concept with my kids. My children started budgeting at a very young age, but it is never too late to start. The category of “savings” is so important for children to have in their budgets. Instead of kids spending all of the money that they get, they can save a certain percentage.
When money becomes tight, like it is for many right now, budgets can be scaled and adjusted to make sure that our finances stay in good shape. Being able to look back and show children how budgets can be (literally) lifesaving is such a powerful lesson. Many people spend without knowing what they are truly spending on; they could benefit so much from just sitting down and creating a budget to get their spending in check. When children are shown that by allocating their money into categories, even with small amounts, they can manage their financial situations much more effectively. This is also a good quarantine activity, for children (for parents, too!) to create, adjust, and analyze their budgets.
There are lots of games out there, as well, such as Life and Monopoly, that can be used to show the value of watching closely where your money is going and how to best budget it.
Multiple Streams of Income
The coronavirus crisis has also shown the world a hugely important, and often overlooked, benefit: multiple streams of income. Just as it is always best to diversify your investments in the stock market, having different ways of making money is crucial.
In slowing economies – like we are likely about to have – when one stream is shut off or slows down, the other ones can compensate for it. Multiple income streams are also necessary when times are good, as people can build wealth and security twice (or three times or more) faster than when they are counting on just one paycheck.
Kids can be taught this concept as soon as they understand the value of money. They can be shown this through simple lessons, or by parents leading through example. I work a full-time job, I teach at UCLA, and I run the Kids Money Academy. I don’t say that to brag, but to show that there are so many ways to create income streams that are completely unrelated to one another.
A computer programmer can freelance as a consultant, a police officer can offer civilian self-protection classes, a martial arts studio can co-operate as an after-school tutoring center – the list goes on and on.
Parents can show their kids the power of money, especially as it compounds over time. The stock market (well, over the long-term, maybe not so much during the COVID-19 era so far) and interest-bearing savings accounts and CDs are other options to increase your income streams.
Encourage kids to think out of the box and create their own income streams. Summertime lemonade stand too limited? How about expanding with a carwash option for customers? Why not have Mom or Dad put that money into an online savings account that pays a higher interest rate? You would be amazed at the creative ideas that children come up with – just ask them!
This crisis has shown the world the danger of having only one income stream – just look at all of the restaurants and one-dimensional businesses that are shutting down. It is a sad, yet very powerful, lesson for kids to learn.
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To kids, the fear and confusion of this COVID-19 quarantine may feel like the end of the world. To parents, it is important to remember and to explain to our kids, that the economic cycle is always churning and chugging along.
Since the advent of money, there have been booms and busts. What goes up will come down, but guess what? It will go back up! Investors in the stock market need just look at a long-term chart to see the fluctuations. The economy will slowly and steadily build steam before contracting in different degrees.
There are four stages: expansion, peak, contraction, and trough. Being in a contraction, and especially in a trough in the cycle, is not fun for anyone. This is part of the natural economic flow, though, and kids can be taught that idea. There are opportunities to be had in each stage of the economic cycle.