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31 Aug 2011

Getting Children Money Wise (Part 2)

Children & Money No Comments

John Vaughan (Financial Advisor) @ Lucid Living

We continue where we left off, in our first instalment – on teaching children the basics of money management to instill an attitude and culture of financial responsibility.

5. Spending. The earlier children learn how to prioritise and limit their spending, the better. Children will not learn if you simply tell them how to spend their money; you have to teach them about making choices. And you will not make it easier for them to make those choices if you meet their every demand.

The two most important things that children needs to learn about spending is: the difference between needs and wants; and deferring spending.

Children must be shown that satisfying their wants: is never-ending, driven by immediate gratification, almost never well thought-out and prevents them from reaching long-term financial goals. Children must be given the opportunity to see that deferring spending, on impulsive wants, leads to achieving something more valuable and financially rewarding.

6. Saving. Children should not be given a choice of whether to save. Saving must be a given. The choices involve how much to save, the period over which to save and which savings vehicles are appropriate.
The final choice of how much to save should be made by your children and not you. The things you should discuss with your children are:
The amount, which should be a percentage rather than a fixed amount, particularly because a child’s income will vary if he or she receives cash as a gift. The time horizon is likely to affect the percentage. If a child wants to buy an item sooner, the percentage will have to be increased.
The savings goal. In setting savings goals, the first target is to make sure your children understand that saving from the start of the month does not mean spending it before the end of the month.
The effect of compound interest is one of the most important things you need to teach children if they are to develop a desire to save for the long term and to re-invest whatever interest or growth they have received on their savings.

7. Debt. It is essential that you start to teach children about debt as soon as possible, because debt is the biggest destroyer of wealth and happiness.

As every adult knows, there are times when debt cannot be avoided. Children need to understand that there can be both good debt and bad debt, and they must be able to distinguish between the two.

Bad debt can best be defined as anything bought on credit that is consumed, such as food or clothing, or that loses its value the moment you buy it, such as a computer or a motor vehicle. Good debt can best be defined as money borrowed to purchase an item that will improve in value – an appreciating asset. The usual example is a mortgage bond on a home, because most property improves in value over time.

You should also explain the necessity of having a good credit record and how a poor credit record will result in paying a higher rate of interest, even on good debt.

These fundamentals will set your children on the path of financial awareness and better money management. The broad aspects covered here, will allow you the opportunity to build on these money management concepts and initiate related conversations about financial planning.

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