Insight 12 - Financial Management for Children - December 2017

Financial management for children

Money management skills are difficult to attain, and decades of experience may be required before the basic tenets of saving and handling wealth are understood.  Spending time with family around Christmas and observing the reaction to gift giving can shine a light on certain behaviours – both good and bad.

Our team is focusing more and more on inter-generational wealth transfer issues, and working with clients to help prepare heirs.   It’s never too early to start teaching children or grandchildren the value of money.

As the world continues to move towards a cashless economy – where you can use your phone to pay for almost anything – it is becoming more difficult for a child to grasp the value of a dollar.

There is no formal training in school for personal finance – and those short term share trading projects do more harm than good!

So, children are often expected to learn basic money management skills on their own, sometimes through trial and error. Even though we continue to pick up financial skills through adulthood, wealth psychologist Dr James Grubman says the primary age range to develop and conceptualise financial skills is 6-14 years old.  Lessons learned during this time tend to make the biggest impact on future behaviours.  This research is consistent with the first hand experience of our team.

Every family is unique so there are many ways to teach these skills.  Adult family members should be aware of how they handle and discuss financial affairs, as children are highly impressionable – and listen to EVERYTHING their parents say – and will mimic those around them without consideration of the consequences.  By teaching and practicing good skills with their children and grandchildren, parents will integrate those behaviours into their children’s routine so they can better handle their own finances in the future.

Preschool

  • Begin with the basics, and teach coin and note denominations.

Infants School (Years K-2)

  • Create a small allowance and monitor how much your child spends each week.  It is better to suggest they save for larger purchases that cost a multiple of their weekly allowance, as that helps teach them that money is for saving rather than spending.
  • Consider using clear jars to split spending and saving, and possibly a giving jar if you are charitably inclined.  The visual makes a stronger impression and can encourage the child to save more (to reach the top of the jar!)
  • Use coins or small notes for their allowance so they can learn how to divide their allowance between the spend and save jars.
  • When they spend their money, allow them to use their actual cash rather than use your own credit card so they can see the actual exchange of money rather than the use of an “unlimited” credit card.

Prep School (Years 3-6)

  • Have your child plan a meal with a given budget during your grocery trip.  Encourage them to calculate and weigh the pros and cons of differently priced items.
  • Open a savings account in their name to help them put away money for the long term. Teach them how to view this balance online and the concept of interest.
  • Provide your child with a prepaid debit card to help them understand the consequences of spending down a balance.

High School

  • Establish a prepaid debit card and allowance schedule so they learn how to access the money and teach them the risks such as overspending, losing the card, etc.
  • Talk about credit.  Explain the importance of maintaining good credit and how it can negatively impact their future credit history if it’s not handled well.  
  • Consider opening a credit card that requires payment in full each month to teach them how to handle credit safely.
  • Whilst this may sound more like a school project (that should probably be compulsory in our schools!), ask your child to prepare a monthly budget based on the full time Australian adult average salary, which is currently around $78,000 per annum.  The budget should include items like mortgage or rental payments, car payments, groceries, insurances, clothing allowances, utilities, holidays, etc.  This will be a very sobering exercise, especially for Sydneysiders.

Young Adults

They have finished studying, have secured their first full time position, are receiving a regular salary and are starting to save through compulsory super contributions and other methods. This group sometimes needs direction and access to information or advice as to how to best organise their finances or put in place a plan to achieve a financial goal. Yes, they can go to their bank, talk to friends or search the web but too many suggestions or information from product sales oriented sources may stifle or confuse, preventing what is really needed; a sound financial understanding of how things actually work and what is in their best interests.

From your son’s or daughter’s stand-point, when it comes to issues such as which credit card/points service, travel insurance, what’s a reasonable monthly budget, how does super work or how do I invest and what are the risks or what apps/tools are available to help them manage their money, the perspective of a true fiduciary acting only in their best interests is essential.

From your stand-point, the provision of options to questions about how you might help financially while instilling financial responsibility or a savings mentality, whether you should gift or loan a lump sum for a property deposit or whether you should help with insurance for your children might also be useful.

Financial skills are honed through experience and education. The earlier one starts, the better chance your children will have to make good financial decisions and achieve financial success.  Our team is always happy to meet with our clients’ children to go over some of these financial basics and to help set them on the right course while they are in the early stages of living a financially independent life.  We often find that children and young adults hearing these rules from someone in the finance industry can have a greater impact or even allow them to ask questions about sensitive financial topics. 

Please contact your adviser or any of our advice team if you have any questions about helping your children achieve the same financial success you have.

 

With thanks to Lourd Murray