One of the things we most enjoy is helping people manage wealth across the generations. Most of our clients are working hard to give their kids (or their grandkids) a good start in life. So it makes sense that we teach those kids how to manage their money well. Here is our guide to doing just that.
This week we continue our theme of inter-generational financial planning. We turn our attention to the very young members of your family.
Unfortunately, the school system is not that great when it comes to teaching kids about managing money. So, if you have kids of your own, teaching them how to manage their money is your job. We want you to enjoy your parenting, and we want your kids to enjoy managing money. So here are our top tips for teaching kids about money.
Understand that they are watching you. Managing money is not just about words and numbers. Many things affect whether a person manages money well. These include things like temperament, personality – and whether people learn to spend money in order to feel better. (Retail therapy, anyone?)
Guess where kids learn about this ‘emotional’ side of managing money? By watching their folks at very close quarters for the first couple of decades of their lives. Like it or not, your kids will grow up to be very similar to you and their other parent. So the absolute best way to teach kids to manage their money well is to manage your own money well.
If you are not great at managing money yourself? Learn! It’s fun, very useful and your kids will thank you for it one day.
Don’t bother with kids’ savings accounts. Many people (grandparents can be the worst) set up specific savings accounts for kids when they are born. These accounts usually pay virtually no interest – making them just about the worst place for the family to put money. Think about it: mum and dad are paying 5% (after tax) on their mortgage while junior is earning at most 1.5% (essentially also after tax) on their savings account. That makes no sense. Put the money into mum and dad’s mortgage (or an offset account) and help the family be wealthier.
Let’s say the grandparents get together and give $1,000 to a newborn baby. If mum and dad repay $1,000 off a loan with an interest rate of 5%, then they will save $1,653 in interest by the time bub turns 20. If bub invests it at 1.5%, he or she will make just $340 over the same period. Repaying the mortgage is almost 5 times better.
Remember what we said about the kids watching you? Well, don’t let them watch the family do something dumb. Manage the money well and when the time comes, explain your thinking to the kids (see our last tip below).
And hold off on the savings account until the kids are old enough to make sense of them. Until then, let them handle cash.
Let them blow a little bit now and learn how bad that feels. The other problem with savings accounts for really young children is that the money is in an account that the kids can’t touch. The thinking is that, if the kids can’t touch it, they will become automatic savers.
That is not actually correct. If the kids can’t touch the money, then they are not actually saving it. (That is why compulsory super gets ‘locked up’ until you retire).
Learning to save means actively deciding not to spend. You can only decide not to spend if spending is an option. So, the money needs to be available to be spent if the kids are really going to learn how to save. And if spending is an option… then blowing it is an option as well. All kids will blow some money at some stage. Don’t worry when they do. Let them feel bad – and don’t bail them out!
After all, feeling bad is a great teacher. Letting the kids feel a little bit bad now is better than letting them feel very bad later in life – when they blow a much bigger amount.
Let your older kids sell stuff second hand. This is a great tip for getting kids to look after things of value. Things like school text books, uniforms etc can often be sold secondhand online. The better the condition, the higher the price. So, if you want your kids to look after their stuff, let them sell the stuff and keep the cash when they no longer need them.
There are a number of benefits here. One is that the kids are encouraged to think long term – what I do in February will have an impact on my cash flow in November. This is a really important lesson to learn (especially if they ever end up running their own business).
If you can get your kids thinking in terms of months and years ahead, you are 75% of the way there.
Secondly, if they look after their things, they will be less likely to need to buy replacement things.
Tell them you can’t afford something. (Even if you can). There is nothing wrong with kids learning that there is a limit to what can be afforded. Kids are growing up in a consumer society that tells them to buy all the time. There is nothing wrong with learning that they can’t afford everything. So telling kids that you can’t afford something won’t bruise them – it will liberate them.
You do need to contend with your own ‘peer group pressure’ here. Who likes to admit that they can’t afford something? But try it. And recommend it to your friends as well. It might liberate them too!
If you will pardon the French, comedian George Carlin is credited with pointing out that “We buy sh*t we don’t need, with money we don’t have, to impress people we don’t like.” Not a great lesson to teach our kids.
Buy quality. The flipside of not buying “sh*t you don’t need” is buying quality things that you do need. So, if something is a genuine need, like good food or a safe car, then buying the best quality you can afford is a great lesson. Very often, in the long run, the better quality thing lasts longer and ends up costing less anyway. That great deal on a car that turned out to be a money pit (and a health hazard)?
Remember, no one ever saved a lot of money buying home brand jam. If you are going to buy jam, buy the good stuff. But if you don’t need the jam…
Put up a no junk mail sign and watch the ABC. OK. This might sound a bit extreme. But kids are bombarded with messages to buy things. McDonalds sponsors Little Athletics, for goodness sake.
Some estimates are that kids see 10,000 TV ads during their childhood. This is a lot of messages telling them to ‘buy.’ So, think about how you can give your kids a break from relentless messages to spend that commercial media gives them.
Remember, for a lot discretionary spending, out of sight means out of mind.
Maybe Netflix is a happy compromise. No ads.
Teach them their reading, writing and arithmetic. ‘Financial literacy’ is a buzzword these days. But financial literacy is really just a combination of two more basic skills – everyday numeracy and everyday literacy. Trust us, if kids are good at maths, this will translate to understanding money.
If they are not good at maths, work on it. And use money to teach them.
Explain. Explain. Explain. Talk to your kids about money. Explain that you have a mortgage and what that means. Explain when the media announces a famous personal declaring bankruptcy. Explain how taxes work. Explain how credit cards work when you are ‘tapping and going’ at the supermarket.
Explain big things about money and small things about money. Teach the kids that marketing can be sneaky. Tell the kids that it costs the cinema the same amount to make a small or a large popcorn. The cost of making the popcorn is basically nothing. But by offering two prices, the cinema gets to sell something ‘small’ to people with a little bit of money and sell something ‘big’ (and more expensive) to people with more money.
You knew that, didn’t you?
Do you have your own tips? There might be some things that you have come across yourself that have helped you teach your kids. Please let us know – we would love to hear about them.