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Warren Buffett: Teach Kids Finance Early

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Warren Buffett, chairman and CEO of Berkshire Hathaway, recently wrote an article about how parents can help their kids learn about money, finances, and investing. Buffett – whose animated cartoon show for kids, Secret Millionaires Club, can be found online – offers practical advice, as well as his childhood experiences learning about money.

Buffett’s primary inspiration was his dad:

My dad was my greatest inspiration. He was my hero when I was six and he is still my hero now. He is an inspiration to me in every way. What I learned at an early age from him was to have the right habits early. Savings was an important lesson he taught.”

Warren Buffett bought his first stock, Cities Service Preferred, when he was 11 years old. Despite his early entrepreneurial pursuits selling Coke and gum, Buffett had limited amounts of investing funds set aside. Whenever Buffett wanted to buy a stock as a teen, he first had to sell one of his existing holdings to free up sufficient cash to buy the new stock.

Buffett explains that “parents need to start teaching kids about the importance of managing money at an early age.” Why wait until kids are in their teens before teaching the basics of money management?

Simple financial lessons, such as the importance of savings and living within your means, can be grasped fairly quickly by youngsters, especially if they are dealing with money they’ve earned on their own volition through various odd jobs.

Teaching kids sound financial habits at an early age,” Buffett writes, “gives kids all the opportunity to be successful when they are an adult.”

The advantage that time can confer to someone’s eventual financial success cannot be overstated. While compounding might be a more complicated concept that kids can only appreciate later in life, it’s also good to remember that the earlier one starts, the more time they give to compounding to work its magic.

Here’s a short story from Foolish contributor Chong Ser Jing that showcases just how important the ingredient of ‘time’ is in one narrow aspect of money matters – investing:

Let’s consider two investors, John and Jane. John is currently 25 years old, has just started investing, and would retire at 65 by which time he would stop investing. Jane is currently 35 years old, has just started investing, and would also retire at 65 and stop her investing too.

Both investors had invested in the Straits Times Index (SGX: ^STI), which has grown from 834 points at the start of 1988 to 3,179 on 9 July 2013, giving it a compounded annual return of 5.4% over the past 25-and-a-half years.

If we assume that the STI’s returns over the next 30 to 40 years would be similar to its past, then John would have gotten $8,200 when he’s 65 for every $1,000 that he has invested into the index now. On the other hand, Jane would only have $4,800, almost half of what John would have!

The difference in the ending amount is stark even though their investing time-line only had a 10 year difference. With compounding, it really pays to start early.”

We don’t want to sound like a broken radio, but in money matters, time really is of the essence.

In the end, Buffett’s recommendations for parents can be boiled down to one message: Teach your kids good financial habits early – as early on as preschool – and be a good financial role model.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by David Kretzman and first published on fool.com. It has been edited for fool.sg