John Vaughan (Financial Advisor) @ Lucid Living
The sooner young children are taught the correlation between what money buys and its real source, the more likely they will grow into financially responsible adults.
Children should learn from an early age that being financially responsible is about making hard choices – and there are very few free lunches.
1. Talk to your children about money management. Not talking about money may imply that money management is not important. Too often, parents and the educational system regard finance as something for adults only. If schools are not teaching this very necessary life skill, it is most definitely a job for parents.
You should involve your children in the household finances. You do not have to be explicit, but discussions about financial responsibility and the importance of saving are critical to instilling the right attitude to money.
Money management should be taught in stages and in various ways, such as giving children pocket money and involving them in discussions about the family finances. For example, you should set aside time once a month when the family gets together to review the bills and decide how the money that is left over will be spent.
Involving your children in budgeting will help them to understand why you cannot afford to buy them everything they want. This may encourage them to find their own sources of income to supplement what your income cannot provide.
2. Money management teaches “having to make choices”. For most of us, if we choose one thing, we have to do without something else. The issue is to make the correct choice. Often, our choices involve deferred spending, and to do that we need to distinguish between a want and a need.
The inability to appreciate the difference between a want and a need is where so many people go wrong in their finances – all too often wants take preference over needs.
You should explain what the choices are and their associated advantages and disadvantages. You can start with simple things, such as whether your children want to forgo buying sweets so that they can afford to buy something more durable and useful, such as a bat and ball. It is, however, important that your children make the final choice, albeit with your subtle guidance.
As your children grow older, you can progress to involving them in choices about the family budget, such as, “Do we buy a new car this year or next?”
3. Work leads to rewards. By giving your children what they want, and by handing them money whenever they want it without having to earn it, you foster the attitude that money is something that simply falls into your lap.
Children will only learn to understand the real value of money if they have to earn it and if they have access only to the amount they have actually earned.
Pocket money is the best tool you have to explain the correlation between work and reward. You should pay pocket money only once your children can understand the concept of pocket money, and why and how it will be paid. As your children grows older, how pocket money is structured and the obligations your children must meet to obtain it can be made more sophisticated and instructive.
Children should learn that pocket money is finite. Once you have decided on an amount, there should be no additional handouts once it has been spent. This will teach children that money must last from payday to payday.
4. Budgeting. Children need to understand that a budget is basically a saving and spending plan. You need to show your children how to save and spend wisely, and how to get the balance right. The emphasis should be on saving and not on spending.
But saving simply for the purpose of saving is not going to foster much enthusiasm for budgeting in your children. They need to know why they are saving and how long it will take to reach a savings goal. The younger a child, the less likely it is that he or she will appreciate long-term savings goals – the savings target should be to buy cheaper items, such as sport or electronic equipment.
A good way to start is decide how pocket money will be structured. In other words, why pocket money is being paid, what the children must do to receive the money and how much money will be paid.
The decisions should also include how to “spend” that money, with “saving” as the first item of spending. The 10 percent-of-what-they-earn rule is a good place to start. They then get used to saving from the first rand.