Financial tips parents can teach their kids in South Africa
Savings is crucial for South African consumers – and it’s best to do so as young as possible.
With their whole lives ahead of them, children have the benefit of time to build up savings and set themselves up for the future.
However, children do not know how to save, so teaching them good habits can help them for the rest of their lives, Investec’s René Grobler said.
Understanding money
Grobler said that parents should have a conversation with their children about the purpose of money, i.e. spending it on things.
The conversation should also consider spending money wisely and understanding the difference between instant and delayed gratification – or paying yourself first (saving) vs paying others (spending).
“[It’s about] people and kids especially, understanding that, even if I don’t get the satisfaction now, I’m paying myself first,” she said.
The time value
Inflation erodes the value of money; however, growing the money is still possible if the “magic of compounding” is used.
For instance, opening an interest-bearing savings account will show the child how their money grows.
“So if a child had R100 pocket money that they put away at the end of the month and they left it in the bank at a 7% interest rate at the end of the year, they would have R107 in their bank account. So if you have R107 at the end of the year and earn another 7% on top of that, the interest you earn in the second year will be higher than the interest in the first year,” said Grobler.
“It’s about people and kids especially, understanding that, even if I don’t get the satisfaction now, I’m paying myself first,” Grobler said,
The rule of 72
Kids – especially those mathematically oriented – can be encouraged to stay the course through the “rule of 72.”
This is a simple rule of thumb that tells you how long it will take to double your money if you leave it to earn interest at certain interest rate.
“So the way it works is you divide 72 by the interest rate you are earning. So 72 divided by the seven we were talking about earlier gets you about 10. At 7% interest, it will take the child ten years to turn the R100 into R200.”
Save as much as possible
After the child understands the ideas of savings and compounding, the next trick is to teach them to save as much as possible and ensure that they are not tempted to see saving as less important than spending.
According to Grobler, individuals frequently tend to set aside the remainder of their funds after making all their expenditures.
“So one of the things you can do, as an adult and also as a child from a discipline point of view, is to give yourself a number, whether it’s a percentage or whether it’s an actual physical number that you organize, to save every month regardless,” said Grobler.
“And the way to look at it is not as a grudge saving, but rather you’re saying, ‘I’m paying myself. This is for my future.”
Being responsible – and creative
Children aren’t earning salaries and are thus reliant on the parent for income via an allowance.
However, that doesn’t mean that they shouldn’t be responsible for it and know what things cost.
“When you give your children pocket money, it’s important to tell them what they are responsible for,” said Grobler.
However, this doesn’t mean that the parents can’t talk to their children about ways to get extra income, for instance, selling things they made to friends.
“Let the kids come up with ideas, open up the conversation,” says Grobler. “Money should not be a taboo subject.”
Diversify
Grobler added that the concept of diversification must be looked at when making saving plans.
Parents should thus look at the different products and funds available to ensure they don’t have all their eggs in one basket.
Loading ...