Most of us get our formative attitudes about money from our parents and these will generally shape our outlook for the rest of our lives. So, what are the financial fundamentals you should be passing on to your children and when?
A University of Cambridge study, commissioned by the UK’s money advice service found that by the age of seven most children are capable of grasping the value of money, delaying gratification and understanding that some choices are irreversible and will cause them problems in the future.
A University of London study in 2000 of South African children aged between seven and 14 bore this out. It found that their views about banking and money were similar to those of children in other countries, although rural children had less understanding than their urban peers.
Neven Narayanasamy, at specialist loan provider, DirectAxis and father of two says the earlier children can start learning about money, the better.
“In doing so it’s best to take a positive, practical reward-based approach explaining money is a tool and if they understand how to work with it, it can bring benefits. Don’t stress or scare them and remember every child is different so you may need to amend your approach and timing.”
Neven says making your money lessons age-appropriate is also important and suggests the following guidelines.
Age 3 – 5: You can’t always get what you want, right now
The Rolling Stones were right when they first sang “you can’t always get what you want” in 1969. Fifty-four years on they still are. We live in an era of instant gratification, from takeaway foods to online shopping. While, hopefully, your three-year old isn’t ordering superhero outfits online during naptime, teaching children early that some things are worth waiting for may prevent them racking up credit-card debt on trendy clothes or the latest tech in later life.
If your child wants a particular toy, explain they’ll have to save for it. Have a savings jar or piggy bank into which you can put birthday money or small rewards for helping out, good behaviour or achievements.
Set them up for success by making sure the goal is achievable and that they don’t have to wait months and lose sight of what they are saving for.
Each time your child adds money to the savings, help him or her count it and work out how much more is needed to achieve the goal.
“It’s a good idea to let younger children handle cash under our supervision. Physically handing over money and counting it will make them more confident about handling money and think a little harder about how they spend it.”
Age 6 -10: You’re responsible for the financial choices you make
You can teach the basics of financial decision making by explaining financial priorities. As an example, tell them that when you get paid you first need to pay bills such as the home loan or rent. Then you need to buy groceries. If you do this carefully and don’t spend money on things that are too expensive of which you don’t really need, you’ll have something left over. You can save some and a bit might be used for doing something fun together.
Practical experience is the best way to drive these lessons home. When they earn pocket money for doing tasks around the house, help them work out a budget.
First, they’ll need to pay bills, such as contributing to a pet’s upkeep. Take them along when you buy groceries, if they want something special get them to contribute as part of their grocery spend. Remind them not to spend all their money as they’ll need to save some. Hopefully, if they’ve not spent too much, they’ll have some left to treat themselves.
“The point is to give children a practical understanding of how to manage money using examples that are familiar. The more you can do this the better, as they’re far more likely to grasp this then abstract explanations,” says Neven.
Age 11 – 13: the sooner you start, the sooner you’ll reach your goals
This is when you can introduce the idea of saving for long-term goals. Perhaps set a goal for something expensive that he or she really wants.
Often in these pre- or early teen years children are reluctant to save because they want to buy things such as snacks at school or more airtime. By setting a bigger goal you can teach them that the opportunity cost – what they need to give up – will enable them to save more and reach their goal faster.
You can also teach them about compound interest: how by saving over a longer period, they benefit from the compounding effect because they earn interest on the money they’ve saved as well as the accumulated interest. For more information about compound interest visit: www.directaxis.co.za/find-an-answer/what-is-compound-interest
Of course, when saving larger amounts of money, it’s sensible and safer to replace the piggy bank or savings jar with a bank account. Some banks offer under-18 transactional account with no fees, such as FNBy. This will also teach them how to manage a bank account.
Ages 14 – 18: understand how to borrow sensibly
As children grow up, their earning potential increases. They may graduate from doing household chores to getting a casual job. Typically, their expenses also increase. They may want to buy a scooter or motorbike to get around, or even save towards a car.
At some point they’ll probably ask to borrow money. When they do, set a goal in terms of what they’ll need to earn before you’ll match them or lend them the remainder.
Work out a reasonable period for the loan and a repayment schedule and charge them a moderate interest rate. Explain there’ll be penalties if they miss repayments and you’ll also be less likely to lend them money in future. While they’ll probably think you’re being a bit harsh, you’re teaching them an invaluable lesson about the benefits of paying what they owe on time and also how to build a good credit record.
As they get older you can use a similar approach to teach them the difference between good and bad credit, such as loans for tertiary studies or starting a business as opposed to borrowing money to fund an unaffordable lifestyle.
As a parent, teaching children about money isn’t something you’ll ever stop doing. Perhaps the most important lesson is to remember you’re a role model.
“If you’ve ever heard a child use a grown-up word or expression they didn’t learn at school, you’ll know they respond to everything they hear or see around them. The same applies to how they learn about money. Remember that and the influence you have not only in terms of what you teach them, but your own financial behaviour,” says Neven.
For more information about money lessons for children visit: https://www.directaxis.co.za/make-a-plan/how-to-teach-kids-about-money