How to teach your kids to be smart with money
Making sure your children are financially literate is key to their future success. But many parents feel ill-equipped for the task.
"Children should be taught how to manage money at school," is the common retort.
A survey of teachers in the US, where personal finance is offered as a course at schools in 17 states, showed that only 20% of teachers surveyed felt competent to teach the subject.
Craig Torr, a financial adviser and father of three, says teaching children how to work with money is a parental responsibility that can't be outsourced. "If you fail in this area, you're not preparing your children for the world," he says.
Parents have the biggest influence on the lives of their children and children are more likely to do as you do than do as you say.
Gerda van der Linde, an expert in behavioural finance, says: "This means you need to be a good example."
And if you aren't one, get your act together. "There is good help out there. A consultation with a top financial planner will cost you R1500 an hour. If budgeting is your problem, get help drawing up a budget; if you don't have a financial plan, invest in one."
Assuming you have a financial plan and you're sticking to it, you're adequately equipped to teach your children how to budget, save and invest, even if you are finding it difficult in the current economic times. In fact, getting your children to buy into your budget and greater financial plan is even more important when money is tight.
Every family should have a household budget which shows investment goals, savings targets and spending limits. Not only should it be open to all family members to view, the budget should be something that everyone had a hand in creating.
What you do with your money is determined largely by what you value, Van der Linde says. If, for example, your family values generosity, your dedicated giving to a charity or a faith community will be a line item in your budget. Likewise, if time together is important to you, saving for holidays would be a fixture in your budget.
When children want something that hasn't been budgeted for, a budget is a useful tool to help them understand the choices - and sacrifices - that the family might have to make to fund the desired item or expense. So when your teenager tells you they "need" a new cellphone, this presents an opportunity for the family to discuss the distinction between a need and a want, whether cellphones should be bought new or if second-hand would do, and where the family might cut back to cover such an expense.
Torr, who runs a financial planning practice with his wife, Sue, says budgeting teaches children about choices and that there is no endless supply of money.
"Our boys know what we earn, what we own, what we owe, and what we save.
"Years ago, they got into the habit of asking us to buy them something to drink every time we went out. We explained that cooldrinks for all of us would cost R50, and if we spent that twice a week, that's R400 a month or R4800 a year - which is a surfboard. You need to put it in a currency they understand," he says.
The Torrs include their sons in decision-making around big expenses, such as holidays. "We love going to Arniston. And there's nothing like a place right on the beachfront, but it costs double the price of accommodation a few roads from the beach. So we said to the boys: 'We can spend a week in Arniston if we take a house on the beach or two weeks if we take a house further from the beach.' They chose the latter. We give them choices, and let them learn if they make the wrong decisions."
The Torrs pay pocket money, but it's not earned. "They don't get paid to do chores; those must be done because we're a team. Pocket money is given to them to teach them to manage money and to give them some independence," he says.
Our boys know what we earn, what we own, what we owe, and what we save
Financial advisor and father of three
Teaching children the difference between saving and investing is critical, Van der Linde says. "You save for a holiday and invest for the future, which may be a university education or retirement."
Bruce Cameron, former editor of Personal Finance and an author of a number of personal finance books, says he negotiated with his children their pocket money and all savings goals. "For every cent they put away for longer-term savings I would match with the same amount. For every cent they withdrew before the target date, I would take double the amount back. None of them ever withdrew. At age 18, they reached their savings targets to travel, buy a car, etcetera. One of them still had savings into her late 20s."
Van der Linde says that when her daughter wanted to take an overseas holiday during high school, she also incentivised her to save by matching her savings. "It's a good principle, but children must be encouraged to save because it's the right thing to do and must have an internal motivation to do the right thing, without expecting a reward."
This goes hand in hand with teaching them about money, she says. If you invest, you benefit from compound interest.
"Perhaps we can get them to reward themselves.
"So, if your child manages to save R10000 by the end of year, they could invest R8000 and use R2000 to treat themselves."
Torr says that before his sons receive their pocket money, an amount is deducted and invested in a unit trust fund on behalf of each son. "We agreed to the amount that is deducted and that it's for big-ticket items, but there's no planned date or time when they will get to cash in that investment."
Children need to be taught that retirement is an investment goal for a time in life when you can no longer earn money to survive, and if you haven't invested for that season of life, you will be destitute.
Your children can learn valuable life lessons from you telling them about how you are investing for retirement. Impress upon them the importance of starting to invest for retirement from their first pay cheque.
If children know that they are likely to be the beneficiaries of your investments, they may be more inclined to appreciate the lifestyle sacrifices that need to be made by the family now.