Talking to kids about finances and investing is awkward and not something that most people know how to do effectively. But that's far from reason enough to skip it.
In this clip, Motley Fool analyst Gaby Lapera and senior banking specialist John Maxfield discuss about why you should talk to your children about investing, how to teach good spending and saving habits, one tip that's been a huge part of Warren Buffett's success... and some other great tips.
A full transcript follows the video.
This podcast was recorded on Dec. 21, 2015.
Gaby Lapera: So, let's flip over to good advice that we've gotten. This is advice that I got from my parents, who think that they did an excellent job raising me, which I personally agree with, but you know.
John Maxfield: The jury's still out on that one, Gaby.
Lapera: Noted. The advice is, "Talk to your kids about budgeting and personal finance. Help them get started if you can." I have been shocked by the number of young people that I know who, getting out of college, for example, they never had a credit card, which meant that they couldn't rent an apartment by themselves, they couldn't buy a car post-college, because they had no credit score, they had nothing. Or, kids who get their first credit card and just go hog wild because they don't understand how it works.
Maxfield: Yeah, I mean, when I think about it, I have two young boys. Teaching them about finance is such a central thing, because finance, if you look at what causes stress in so many people's lives later on down the road, it's the inability to manage finances. So, if you can cut that off at the pass when they're young, it's a great benefit to them later on.
Lapera: Absolutely. And you hear about all sorts of different methods. For example, if your kid gets an allowance, having them have to take part of their allowance and put it in a savings, and part of it goes to charity, if that's important to you, and then the rest of it can be spending money, that's a really easy way to start young kids understanding how budgets work for them, and how they need to save up for things they want, they can't just blow it all at once, because of what happens later on.
Another bit of advice that we got was more in terms of stocks. "Buy things you see around you." The story that I got was a friend of mine who was really active in the lacrosse scene growing up, and he would go to tournaments, and all the kids would have Under Armour. And this is back before Under Armor was big, but his parents were like, "Maybe we should buy stock in this thing, it seems like a lot of the kids are wearing it." And, as you know, Under Armor's stock has just gone up and up and up. So, if you have young adults around you, often, the things that they find popular and that they're using, tend to be market movers. So, that's a good way to invest.
Maxfield: If you think about, last week, we talked about great books that we recommended to investors. And one of the top five that people at The Motley Fool was Peter Lynch's "One Up on Wall Street," where he really digs into the "buy what you know" philosophy. And the other great investor who delves into the same philosophy in terms of investing is Warren Buffett. But he pitches it as, you always want to buy investments that are within your circle of confidence. That's why, as a general rule, he avoided technology stocks, which had been good, but it just wasn't something that he knew about.
Lapera: Absolutely. You can apply this to your own life however you want. For example, I really love burritos. I know what makes a good burrito, so I can go out and try a bunch of different burritos, and say, "You know what? This is the best burrito I've ever had," and then invest in that burrito company. That's a common-place example for how that might work.
Maxfield: The funny thing is, you kind of chuckle about it, but you're right. I can literally remember the first time I ever ate a Chipotle burrito. I loved it. To think back, if I had acted on that impulse and bought stock, well, Gaby, I probably wouldn't be a co-host on the podcast right now. You know what I mean? I'd be living a life of leisure, the life of a gentleman. Trotting around on horses and things like that.
Lapera: I would have a Maxfield-shaped hole in my heart.
My last point of good advice I've received -- again, from my parents -- is, "If at all possible, spend less than you earn." This is a really basic concept that a lot of people seem to have trouble with.
Maxfield: Keep this in mind -- if you want to be a capitalist, you have to have capital. And the only way to gain capital, if you don't inherit it, is by saving, spending less than you earn, and allowing that to accumulate.