by Dave Ramsey
Saving Money Won’t Kill Your Kids
I’m not going to lie: I really didn’t like Denise’s car very much. Sure, it was in good shape and it got us back and forth to the store for our frequent restocking trips for Your Integrity Snacks, but it wasn’t what I wanted to end up with. Simply put: I wanted a better car than my sister had. That’s when the dream of the magical yellow Xterra started growing in my fourteen-year-old mind. The problem was, I still thought it was impossible for me to save up that much money. I was fourteen when Denise turned sixteen, so that meant I had only two more years to save. There was no way I could do it!
So I did the only thing I could think of: I created a full PowerPoint presentation for my parents, outlining exactly why it would be crazy to make me save up for a car. I got everything ready, and then I called them into the living room for my little speech. I went through—in great detail—all of the bad things that could happen if I had to save enough money for half of my car. For example, I told them in a serious tone how much my schoolwork would suffer if I had to spend so much time working. I needed to focus on my education. If I fell far enough behind at school because of part-time work, I would fail out of high school. Then I’d never be able to go to college, and I’d end up working in a fast-food restaurant my whole life! To drive that last point home, I added in several slides with logos from Burger King, Taco Bell, and McDonald’s.
Then the presentation got even more serious. I passionately explained how worrying about saving that much money would put a huge amount of stress on me, which would endanger my health. My health! If I worked that hard, I wouldn’t get enough sleep and would end up physically ill. That would lead to a weakened immune system, which would eventually lead to my death! For the big finish, I cried, “How can you possibly put me—a happy, healthy young teenager—in that kind of jeopardy? I am your own daughter!” Cue the tears.
I’m sorry, did I say “tears”? I must have meant “cue the laughter,” because that’s the only reaction I got. Mom and Dad looked at each other, totally cracking up as they got up from the couch. As they walked out of my failed sales presentation, Dad just looked down and said, “You get points for being creative, Rachel. But you better get to work.” So . . . I did.
DAVE: Yeah, when drama doesn’t work, you have to try working!
Double or Nothing
RACHEL: For the next two years, I got serious about saving money. I had been a spender all my life, and for the first time, I started to analyze every little nickel-and-dime purchase I made. Because of the match, I knew that all of my spending and saving decisions were doubled. If I spent fifty dollars of my babysitting money on clothes, I’d have $100 less for my car. Or if I turned down a thirty-dollar babysitting job one night, it would really cost me sixty dollars when it was time to buy the car. That realization alone gave me a ton of incentive to not only keep saving, but to also avoid spending.
After two long years of saving and sacrificing, the day finally came. On my sixteenth birthday, I had a total of $8,000 saved up—before the match. That meant I had $16,000 to spend on a car! Not bad for a tenth-grader. In fact, I felt really empowered. I knew that Xterra would be mine!
Revising the Dream
When the day finally came to go car shopping, I thought, This will be easy. I know exactly what I want, they have it in stock, and I can afford it. This won’t take long at all—and I am going to leave here with my own car! But once I got the SUV out on the road for a test drive, two years’ worth of expectation and excitement quickly drained out of me. I didn’t like it. I didn’t like the way it drove. It didn’t feel right. What? How could this be happening? I thought. I couldn’t talk myself into it. The magnificent yellow Xterra of my dreams was gone. I had to start the car search over from scratch.
This created a whole new learning opportunity for Dad and me that I never expected. It gave us the chance to talk about what a big decision it was to select the right car. Dad said, “Rachel, this is how you learn patience. As you grow up, you’ll discover that a lot of things you think you want actually turn out to be not as great as you expected. A car is one of the biggest purchases you’ll ever make, so let’s take a step back, catch our breath, and think about what you really want. This is not the time to get impulsive just because the Xterra didn’t work out. That’s how people end up making terrible decisions that haunt them for years. I don’t want that to happen to you after you worked so hard to save this money.”
Looking back, that lesson in the car lot was almost as valuable to me as the whole car-saving experience. With a clean slate and $16,000 to spend, Dad and I started a new car search. Along the way, I got to experience the power of cash in negotiating. Putting a little bit down and making monthly payments for five years doesn’t give you much leverage when you’re standing face to face with a car dealer. But standing at the front of a car you like and waving $16,000 under the dealer’s nose? Yeah, that gets you a bargain.
Lessons Learned
When all was said and done, I ended up with a beautiful black BMW 323. It was used, of course, but in great condition. It served me well for several years, and I loved that car. Because I had worked so hard for it for so long, I drove it a lot differently than my friends who had a car handed to them. I knew that car was mine, not because I owned it, but because I earned it. That made me appreciate it and care for it on a level I never expected.
I learned a lot of other lessons through my two-year car-saving drama, too. The main thing that stuck with me is that even twelve- or thirteen-year-old children are capable of setting—and achieving—enormous financial goals. I think back to when I was fourteen, making a case to my parents about how impossible it would be for me to save that much money. I didn’t believe I could do it. Fortunately for me, my parents knew I could. They never doubted what I could accomplish if I would set my mind on the goal. Their confidence in my abilities frustrated me at the time, but it’s so precious to me now.
I also learned that hard work never killed anyone—not even someone in high school. I didn’t have any trouble getting good grades and really enjoying my high school years while I was working hard for my car money. I figured out how to manage my time so I could do everything I wanted and needed to do.
All of the lessons I learned during those years—the power of cash, the importance of wise decision making, and the discipline of working toward a big goal—are major parts of the woman I’ve become. And I owe it all to 401DAVE. Go figure.
DAVE: We are so proud of all three of our children for working, saving, making the most of the match, and making wise purchases on cars. We certainly had the money to write a check and buy each of them a brand-new car on their sixteenth birthday, but that perpetuates the entitlement mentality.
Not everyone is able to match. You may match part, but maybe not dollar for dollar. Perhaps others can provide income opportunities for your children to earn the money for a car. Because my parents were in the real estate business, they were able to get me jobs painting and fixing up houses when I was fifteen, and that helped me earn enough for my first car.
A car purchase—or any other item your child saves for—gives you the opportunity for multiple teachable moments. Rachel learned many lessons with her car purchase. First, she learned she couldn’t “sell” her way into a car—drama is not interchangeable with money. Second, she learned more about the value of working hard. Third, she grew up, because saving money requires emotional maturity. Delaying pleasure is one definition of maturity. Adults devise a plan and follow it; children do what feels good. So Rachel grew up a lot while saving for her car. Fourth, she learned goal setting. Fifth, she learned to gather information before buying something, especially after the test drive in the yellow Xterra didn’t go so well. I remember watching her body language change as she made the decision to walk away from the very car she thought she had worked so hard for. I watched a girl move toward womanhood before my eyes as she straightened her posture, threw her shoulders back, and walked away
toward a better car. None of this would have happened if Sharon and I had simply bought Rachel a car.
One other note: If you’re thinking about doing a matching funds arrangement like we did, I encourage you to put a cap on how much you’ll match. You’ll see why this is important in the next chapter when you hear how well my son did with his 401DAVE.
SAVING FOR EMERGENCIES AND WEALTH BUILDING
RACHEL: We said teens and adults need to save money for three reasons: purchases, an emergency fund, and wealth building. We’ve covered purchases pretty well, but the other two reasons—emergencies and wealth—can be a tougher sell for your teen. Getting a teenager excited about saving for emergencies can be a difficult task.
What’s an Emergency?
Once your child is in high school, I recommend he saves up a $500 emergency fund. Sure, you as the parent will be there to cover any real emergencies like health scares, injuries, and major accidents. But teenagers have teen-sized emergencies pop up all the time that they should be prepared to handle. For example, a cracked cell phone may not make it on your list of critical emergencies, but losing the ability to text could be the end of the world for your teen. Of course, you could replace a broken phone (and there’s nothing wrong with that), but if your son comes to you with his third broken phone in less than a year, he may need to feel that responsibility himself. If he has to buy his own replacement phone, maybe he’ll be a little more careful . . . and invest in a thick case for it, too.
I got a flat tire once in high school, and I vividly remember the feeling of pulling the money out of my own savings account to fix it. It’s amazing how those moments changed my view of money and my stuff. It wasn’t just about ownership; it was about responsibility. I took better care of my things when I knew I carried much of the financial responsibility for them. Of course, emergencies didn’t happen very often. I can count on one hand how many times I had to dip into my own emergency fund. But having that money set aside in the bank gave me a feeling of confidence and independence. I knew that if something happened, I could probably cover it. That’s a feeling a lot of adults don’t have, but my parents instilled it in me when I was a teenager.
As the parent, you’re training your children to be competent adults—and adults need to be prepared for emergencies. So teach your kids to save up a $500 emergency fund in high school, and don’t be scared to let them use it for their own emergencies from time to time.
Setting an Example of Saving
DAVE: Parents, when your hot water heater goes out, your children are watching your reaction. If you go into freak-out, drama mode every time there is an emergency because you are broke and have no emergency fund, then your children will learn that emergencies mean panic and worry. If instead, you simply write a check and fix the hot water heater, the children will feel emotionally secure because the household is stable, and they will also observe how important a rainy-day fund is. To make sure your children are learning, talk through the event and discuss why you were not freaked out.
Many of us grew up knowing about our grandparents who always had rainy-day funds. One lady in Financial Peace University told me her grandmother always paid for problems out of her G.O.K. fund—her “God Only Knows” fund. Lesson observed and lesson learned.
Never Too Young for Wealth Building
RACHEL: When I was growing up, my parents kept me focused on the basics. I had an emergency fund, I never used debt, I paid cash for my car, and I made sure my college education was covered. If your child has those bases covered, she’s doing great! But don’t be afraid to push it just a bit further and start explaining how investing and wealth building works. Even if she doesn’t put it into practice right away, laying that groundwork early on can change what she does with that first paycheck out of college.
I was in high school when I first asked my dad how a mutual fund works. I’ll admit I didn’t get it at first, but after several conversations, I finally understood. He even explained to me what compound interest was and how important it is to start investing early. It’s amazing to me that many young adults I meet have no idea how investing works. These are working adults who are earning real money and squandering years of compound interest because they don’t grasp the urgency of investing early in life. They’re losing literally hundreds of thousands of future dollars because they lack the training and information.
Don’t miss your chance! You have the power today to set your child up to be a millionaire by giving him this knowledge. And in doing that, you can completely change your family’s financial legacy.
DAVE: Teaching small children about mutual funds or compound interest is ridiculous unless you are raising a genius. Nevertheless, from time to time as they are growing up, you can show your children the file where you keep their college saving investment statement. Then when they are around twelve years old, pull the statement out and let them do the simple math to see the future value of the account.
Sharon and I kept our children’s college investment funds an occasional topic of conversation as they grew up. First, this showed them that college attendance was assumed at our house and that we were saving to give them a better life. Second, using the actual financial terms provided a quick teachable moment for our twelve-year-old. Once they were in high school, I sat down with them and explained what a mutual fund is and how it works. Honestly, I didn’t expect all the details to stick, and they didn’t, but the overarching discussion did—that college and investing are a natural part of life. So for my grown kids today, they just assume that they should be investing—and as they actually do it, they relearn the details for themselves.
Long-term investing is important, but your teenager has a couple of more urgent savings goals: buying a car and paying for college. In Chapter 6, we’ll walk through the five things your teen should do with his money before long-term wealth building enters the picture. If you want to know more about long-term investing in general, be sure to check out daveramsey.com for plenty of information, tools, and resources.
SAVING FOR LIFE
RACHEL: Learning how and why to save money is one of the most fundamental financial disciplines there is. I can’t think of a better way to set your child up for lifelong success than to simply teach him how to save. It’s not always easy, and it certainly isn’t always fun. But knowing how to save, delay gratification, set goals and priorities, make huge purchases with cash instead of debt, cover emergencies, and prepare for long-term investing is critical for any young man or woman leaving home for the first time. These are all lessons you can teach your children today, no matter how old they are or where you’re starting from.
CHAPTER FIVE
Give
It’s Not Yours Anyway
DAVE: As far back as I can remember, I have been driven to reach certain goals. My parents gave me the wonderful gift of believing I could do anything I set my mind to if I only worked hard enough. So as a young man I set my mind to the gathering of “stuff.” Some people call that materialism, and there might be some truth to that, but all I know is that I wanted some stuff. Making money was simply a means for me to live the good life, because, after all, it was all about me. Or, did I mention that already?
Since making and having money was simply an exercise in self-indulgence, I was more than a little self-centered. Then in my early twenties, I met God. I met Him in a radical, life-changing way, and after He entered my life, He began reshaping my selfish heart into the heart of a giver. He has been working on that young selfish guy ever since. I began to learn and understand what Christians call “stewardship.”
Stewardship is really not a Christian word, but an Old English word from around the time of the King James translation of the Bible. The word in feudal economic times described a person who didn’t own anything, but managed the affairs of the lord of the realm. This manager’s title was “steward.” He had a nice house, beautiful clothes, and fine food, but it wasn’t really his. He enjoyed all of the benefits of the lord’s weal
th, but he felt no sense of ownership over it. Similar to those medieval stewards, when we realize we are simply managing someone else’s money, it changes our focus.
For instance, it is easier to give away other people’s money than it is to give away your own money. The first and most important lesson about money that Sharon and I taught our children is that money is not theirs. As a family of faith, we believe that God owns everything, and we are asked to manage it for Him. We don’t own it, which makes it easier to give.
Recently we made a $10,000 donation from our company to a radiothon. I don’t know where you grew up, but where I come from, that is a lot of money. I asked my controller to write the $10,000 check, and she did not hesitate. It was not hard at all for her to give away my money. Sure, it was a little harder for me than it was for her, but it wasn’t really that hard for me either. She knew the money wasn’t hers, and I knew the money wasn’t mine. It was God’s, and as a steward, I was just doing what the Owner told me to do.
If you want children who are less selfish; if you want children who view wealth as a responsibility, not a meal ticket; if you want children who look at the future as a bright place; if you want children who function with a spirit of abundance rather than a spirit of lack, then you must teach them that they don’t own money—they are simply managers, or stewards of it.
CURING THE ME MENTALITY
RACHEL: It’s always funny for me to hear Dad talk about how hard it was for him to learn how to give. The truth is, giving has been a big part of our family for as long as I can remember. The thought that there was a twenty-something version of Dad back then who didn’t give is hard for me to imagine. It really demonstrates how powerful these principles are and how they can totally transform you at any age. My whole life, I have only known Mom and Dad as outrageous givers. That doesn’t mean they give money to every single ministry or charity that asks for donations, and it certainly doesn’t mean that they’ve always gotten it right. Trust me, they’ve made plenty of mistakes, even after they learned these lessons. Hey, I’ve made plenty of mistakes myself, and I’ve been living by these principles since I was born! No family—not even ours—gets this stuff right every time.