Explain Like I'm 5: The Top 3 Financial Tips That a Child Could Understand

Many aspects of adulthood can feel overwhelming. Picking a healthcare plan, choosing an insurance policy, and paying taxes all come to mind. For many people, figuring out their personal finances might also make the list. And while a ton of complicated factors can go into a person’s financial picture, there are also plenty of really simple but effective money tips that anyone can understand — even a kindergartner.

1. Don’t borrow more than you can afford to pay back

If you’re on the playground and borrow someone’s kickball, but you launch it over the fence to win the game, you’re not going to be able to give the ball back to the kid who lent it to you. Now you have to go out and buy a new kickball to pay them back.

The same concept applies to overspending on a credit card. If you spend $1,000 on a big vacation but can’t afford to pay it off when your credit card bill arrives at the end of the month, you’re going to end up paying interest on your expense. Credit card interest rates can be really high, with the average rate sitting at nearly 23%. If you decided to put $100 per month toward your vacation bill, it would take you 11 months and cost you an extra $119 in interest to pay off.

RELATED: Credit Card Interest Calculator

Instead of going for the home run (or pricy vacation), kick a single and choose a low-cost day trip instead. Don’t put yourself in the position where your choices unnecessarily cost you more money over time.

2. Put some of your money in savings and stocks and leave it be

It’s springtime, and you got some carrot seeds from the garden store to plant in your backyard. You find just the right spot for them, clear out the weeds, add some water, and wait for them to grow. If you get impatient and start poking, prodding, and digging up the seedlings to see how they’re doing, it’s not going to go well.

It’s a good idea to take the same approach to saving for the future. Find a good home for your cash — whether that’s a high-yield savings account, an individual retirement account (IRA), or a taxable brokerage account — tend to it gently, and add to it occasionally, but keep your hands off for the most part until it’s harvest time. Even Warren Buffett says this is an excellent long-term strategy to grow wealth.

If you fiddle too much with the funds, whether by tapping them for unnecessary expenses or moving them around to try to find just the right patch of sunlight (or a slightly higher interest rate), you’ll lose out on the chance for your money to grow.

3. Earn rewards on your spending

There are two candy stores on opposite sides of the street. Both stores let you buy whatever you like, but one store has a promotion running where you get a free lollipop with every purchase. When deciding where to spend your allowance, you’re probably heading over to the store with the free lollipop, right?

Now replace lollipops with credit card reward points. If you have the credit score to qualify for a card that earns cash back or miles on your purchases, you’ll come out ahead. Why pay with cash or a debit card when you could pay with a credit card that lets you accumulate free candy?

Many credit cards that earn rewards charge an annual fee, so you’ll have to decide whether the benefits outweigh the cost of the card. But in many cases, you can earn a lot more in rewards than what you pay for an annual fee, as long as you can make your full payment on time every month to avoid accruing interest on your spending.

Keep it simple

There are a ton of important decisions we need to make when we grow up, and it can be daunting not knowing which is the correct path. But not everything has to be so complicated. Just because a piece of advice is simple doesn’t mean it’s ineffective. Follow these tips, then grab a juice box and a snack pack; you’ve earned it.

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