Do your children have a firm grasp of the concept of money? Do they understand the basics of saving and prudent investing? It’s important to teach them sooner rather than later and arm them with the right investment tools that will last them a lifetime.
According to Forbes.com, research has shown that only 22% of millennials demonstrate ‘basic’ financial knowledge. “This puts young adults and their newly-acquired wealth at considerable risk,” says Mike Fannin, Founder and Senior Wealth Specialist at Carrick Wealth. “Just how well-equipped and prepared are many of these young adults to manage, grow and protect their wealth? A key lesson for children is there is a big difference between being rich and being wealthy, or between having a large income and being wealthy. The difference lies in attitude and what you do with your money.” And the right attitude can be developed with early financial education.
“It’s never too early,” says billionaire Warren Buffett. “Whether it’s teaching kids the value of a dollar, the difference between needs and wants or the value of saving — these are all concepts that kids encounter at a very early age, so it’s best to help them to understand it.” You can start teaching the beginnings of savings to kids as young as three with a simple piggy bank. Ideally the piggy bank should have four compartments to show them how to prioritise: save, spend, invest and donate. Keep the message simple and explain with stories, and your own learnings. Help them understand the difference between saving their pocket money and investing – using their money to create more money. The next step is to open a savings account and allow them to ‘manage’ it. In this way they can learn how and where their money is held, interest accumulation and how to read a statement. Set up a regular payment into the account from their pocket money and encourage them to add a portion of any birthday money they may receive. A lesson in compound interest is a real lesson in how money grows and how substantial returns take time.
2. Set a basic budget
Learning money management and keeping track of one’s money is a critical lesson for kids. Create a simple budget which shows the monies coming in and going out so that they always have a handle on how much they have and if their ‘income’ is enough to cover their ‘expenses’.
3. Risk and reward
One of the most important lessons is that of risk and reward – reward being the gain (small or large) that the investment makes over time and risk being the possibility that the investment can lose some or all of its initial value. Make it clear that most risk cannot be predicted, but it can be managed – when they are older they can be taught about high–risk, high–return investments such as stocks or low-risk, low-return investments such as bonds.
Explain that this is the next step in making money work. Once they recognise the difference between saving and investing, they can start learning the basics of stocks and bonds, profits and losses. Share your financial journey and what you chose to invest in and why, and then allow them to start micro-investing by picking a stock. ‘Cool’ companies like Google, Apple or Nike may appeal to them. As they get older they can add a mix of stocks, using say a third of their savings. Help them track the stock price to gain an understanding of how the markets dip and correct. If you’re investing cash on their behalf, keep them involved and interested. There are also various online simulations and gamifications of the stock market aimed at the younger generation.
5. Teach them to give
Children should be taught that in addition to saving, it’s important to share or donate. Use Warren Buffett as an example of someone who is passionate about giving – and has still made a fortune.
Whether your children are able to put money away yet or not, the aim of financial education is to establish good habits for the future and help them develop a healthy relationship with money. Children need to be made aware that there are people who can help them make sense of it all when they are older and you are not around. As long as they are prepared to take charge of their life and financial future, they can build a long-term plan with a financial advisor when the time comes.