Kids need to be taught about the value and appreciation of money from an early age – how to do this and when to do this is often the question. Luckily children learn fast, as they are incredibly inquisitive and even more so when they start to see how to reap the benefits of their hard work and savings, says Craig Hutchison, CEO Engel & Völkers Southern Africa.
“Introducing kids to money and how it works should begin at home. We want to avoid sending our youth out into the world without a good working knowledge of how finances function. Preparing them fully for the rigors of investing, credit, mortgages and all the other facets of our day to day living” said Hutchison.
He said that teaching children the fundamentals about earning and saving, and how to deal with money from an early age, will be extremely beneficial to them in the long run and is essential for their future financial success in adulthood. Showing children the basics such as how to budget, spend and save will establish good habits for life, the best lessons your children will receive will be from observing you in your daily life.
If you can manage to get your child to save a sum of money per month starting now, and increase it with a chosen percentage of your choice per year, by the time they reach 21 based on a normal interest rate on savings, they may possibly be able to start climbing the property ladder.
This could give them an advantage, to use either as a bond deposit, bond and transfer costs or even their very first rental deposit. “Starting off with a property at such a young age, will mean that they could potentially buy their second home by 25 and grow their portfolio from there” said Hutchison.
7 things kids really need to know about money
The concept of money: Parents should teach children that money is a helpful tool that makes it easier to get what we need and want, now and later.
“Parents can start teaching children about money through play. Allowing children to role-play scenarios where they pretend to purchase something is a wonderful way of letting them learn about the value of money, how much things cost, how money works and the importance of counting.
“There are a number of toys on the market that help introduce small children to money, such as LeapFrog’s Count Along Register for ages two years and older. Kids learn quickly, so it’s never too early to introduce them to how money works,” said Chiquita Patrizi, spokesperson for Prima Toys.
The value of working for money: It is important that kids learn from a young age that money doesn’t magically appear it must be earned. Discuss the importance of working for money and then give kids appropriate paid jobs in addition to expected household duties. As they get a little older, encourage them to make money outside the home by caring for the neighbor’s pets or washing cars.
The importance of saving and sharing: If kids have money, they’re likely going to want to spend it; they need to be taught by the time they reach school that it’s not OK to spend all of their money at once. Since spending money comes naturally, they also need to learn about saving and sharing.
You can help them learn this by teaching them the 20-10-70 rule:
Save 20% – this will teach them to always pay themselves first.
Give 10% – this teaches them the value of sharing and giving to others who are less fortunate or to causes they care about.
Spend 70% – this teaches them to spend less than they earn, which is the cornerstone of personal finance.
The difference between needs and wants: Teens have a hard time distinguishing true needs from actual wants. For example, clothes are a need, but brand names are a want, food is a need, but fast food or pizza is a want. To help teens learn the difference between the two let them do their own clothes shopping.
Determine a shopping budget and create of list of items they need to buy. Give them a gift card that can be used in any store at the mall and let them make the difficult decisions when it comes to limited resources and unlimited options.
How credit works: Just as your kids notice you’re using money to buy things, they’re also likely noticing that you’re paying with plastic. Parents can tell kids that whenever they use a credit card or get a loan, the bank is providing money for the purchase; the bank will send a bill showing how much you owe.
If you don’t pay all of it, you will have to pay interest on the remaining balance. That interest can add up over time, so you end up paying more than the actual cost of the item you bought. They should also be taught to spend only what they can afford to pay off each month so they don’t end up in debt and don’t harm their credit score.
The benefits of investing: Between the ages of 8 and 12, parents can introduce the concept of investing to their children. It’s important to teach them the money you make can make even more money, if you invest it wisely. Parents should explain that it requires taking a risk, with the expectation of achieving a return. It’s important to discuss how much risk you should be willing to take when investing.
Explain that money invested can grow over time thanks to compound interest, which means that interest is paid on the amount invested plus the interest that grows on that investment. The earlier you start investing, the more time you give your money to grow and the more you’ll have.
Parents and children can open an investment account together using some of the kids’ money.
The concept of net worth: When your kids are teenagers, you can start to explain the notion of net worth. In a nutshell, it’s the difference between total assets – what is owned, and liabilities – what is owed.
Kids need to understand net worth because it’s a truer measure of financial health. For example, you could earn a lot of money. But if you also owed a lot of money, you could have a negative net worth. In other words, you wouldn’t have financial freedom.
Hutchison highlights a money teaching guide based on age:
How to save (Age 3-6)
- Teach them not to spend money immediately and that it can be kept later for future purchases.
- Use different envelopes for long and short term goals let them draw a picture on the front of the envelopes of what they want. Help them calculate how much to save each week, keep a realistic time frame otherwise they might get frustrated or bored.
Earnings & Spending (Age 5 – 8)
- Have them do different chores in exchange for money.
- Add their earnings to a jar so they can see the money building up over time.
- When they shop let them pay for their item themselves.
Opportunity cost (Age 7 – 11)
- Teach them the benefit or value of something that must be given up to gain something else
- Allow your children to price and sell their own items. This will teach them about setting a value for their items, making decisions, and negotiating prices.
- Give them R50 and ask then to pick 3 R20 items, they would like to buy, ask them to choose 2 items because they can’t afford all 3, explain that sometimes we need to make financial decisions based on the money we have.
Budgeting & Investing (Age 13 – 16+)
- Give them a set amount of money to buy family presents, help them decide on how much to spend on each person, discuss how they can make decisions around choosing items within their budget
- Explain to them that paying for university now can earn them money in the future, show them that different university course have different costs, look at the different earning potentials of the professions to show them how an investment can pay off later.
- Assist your children in opening a cheque account and teach them how to manage/balance their accounts. This will teach your children how to keep an eye on the bigger financial picture.
- Spend time with your children learning how the stock market works, what it is and why people invest in it.