4 Things to Teach Your Kids About Retirement

As a father, I want my child to do well financially when he grows up. Of course, every parent wants their children to succeed, but for many families it will be difficult. In the United States, we depend on parents to teach their kids about personal finance. Unfortunately, many of us are not very good with our own finances. American households owe a large amount of credit card and other consumer debt.

Our public education system also isn't eager to sign up for financial education. Only 17 states require students to take a personal finance course as a high school graduation requirement. That's too bad, because the best time to learn about retirement is when you're young. On the other hand, there is a lot of good free information about retirement on the Internet. It's very easy to learn about personal finance and teach basic concepts to your kids.

Our child is only three, but I worry about his future financial education. I know three is pretty young, but it's best to start learning about money as soon as you can. We're starting off with buying groceries, and we'll build good financial habits as he grows up. Here are some important lessons about retirement that I plan on teaching him:

Live within your means. As a young person, it can be difficult to understand the concept of living within your means. Parents provide everything, and kids usually aren't involved with budgeting. However, it's important to include kids in mundane money decisions. For example, we'll ask our kid if we should buy generic or brand name apple juice when we go grocery shopping. The product is identical, but generic is more affordable. Eventually, he will learn that we try to spend less money when we can.

The most important thing is to lead by example. If you don't make a lot of money, then don't live extravagantly. You don't need to fill your home with a bunch of stuff. Kids need to know that money is not an infinite resource. Parents spend a lot of time at work to earn that money, which doesn't just come from the ATM.

Learn to save. I'm sure every kid has a piggy bank, and it's important to teach them about delayed gratification. When our kid wants to buy a toy, we'll tell him to save up for it and we'll match him. He's pretty young right now so he'll forget about the toy in 15 minutes. He already knows that when something breaks, we will try to fix it instead of just buying another one. I think this is a good policy as he gets older. He'll learn to put off purchasing in order to save for a more important goal. I'm sure as he gets older there will be many more goals for him such as a trip, sporting events or musical instruments.

Invest early. Most of us know that investing early is the best way to grow your wealth, but how many of us saved when we were in our 20s? It's difficult to save and invest when you're young because life is just too much fun. A lot of us also didn't know about compound interest when we were young. But imagine if you had started investing in your teens. Kids won't be able to invest much because they don't make a lot of money, but the amount invested will compound very nicely from the extra time invested.

I plan to open a Roth IRA for my son and to help him invest any earnings he makes when he's a teenager. He can use the money he made from his jobs, and we'll contribute to his Roth IRA. If we invest $1,000 when he's 17, it will be worth over $50,000 when he's 67 (assuming 8 percent annual gains). That's the dramatic effect of compounding.

It's also important to drill your kids to invest in their 401(k) as soon as possible. I didn't want to invest in my 401(k) when I started my first job because retirement was 40 years away. However, my dad kept bugging me until I contributed to my 401(k), and I'm very thankful for that. Teach your kids about compound interest, and encourage them to use a 401(k) beginning with their first paycheck.

Career flexibility. One thing that is rapidly changing for the next generation is the length and type of careers they will have. When I started working, I assumed a career would last 40 years, but that's not the case anymore. Life is unpredictable, and you can no longer assume that you'll stay in the same career forever and keep making money. It's important to save while you can because you never know if your career will change in the future. The millennial generation is already changing jobs and careers every few years. I can't imagine what careers will be like in 20 years.

For our children to succeed financially, we need to involve them with our financial decisions. We need to set good examples and show them how to be fiscally responsible. Daily life and retirement will be much easier for them if they live within their means and start investing early. These are simple concepts, but they can be difficult to follow. If we start teaching our kids about money early, then they will be able to start these good habits while they are young.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.