Teaching Money To Kids

Financial Skills Are Most Valuable When Learned Early

May 16 - 17, 2009. Teaching money skills to kids in hard times makes sense. South Africa has been shielded to some extent from the full brunt of the world economic crisis. However, we have certainly felt the pinch in South Africa, and observed that many people have had to review their personal finances and spending habits, and understand their monthly budget. I am sure this has been unpleasant, but it may well prove to be a valuable lesson for the South African community. How then do we successfully use this to our advantage, and start to teaching money to our children - effective financial planning, and financial discipline?

According to a recent survey, over 90% of children ranked their parents as their primary financial educator. As a parent, you will know children are often more perceptive than we realize. Maximise this by making sure your sound financial habits become second nature to your children.

Teaching Money Starts With 'Wants vs Needs'

Teaching money to kids involves showing them the difference between needs and wants. We all have wants, but do we really need that item? The ability for a child to understand the difference between needs and wants will create a solid financial platform for their future. Practically, you can start to instill this discipline at an early age on your weekly grocery shopping trip. Teach your child whilst there are many items in the store that they may want, they do not need them. Instead of saying “we can’t afford it”, tell your child that it is not in the budget. This instills an understanding of budgeting. Don’t ignore those wants, however. This is a good opportunity to teach your children how to budget effectively, and by managing their budget and saving for a specific want, they can realize that want.

Let Them 'Waste' Some Money

What happens if you feel the item they specifically want is a waste of money? Provided your children have saved enough money for their specific want, it is important that they are allowed to go ahead and buy it. Finding out that it was not worth the money spent on it will start to teach them the value of money. This valuable lesson helps to instill smart spending habits. By teaching your child to save before purchasing that specific want, you are also teaching them how to avoid utilizing credit.

When to Start Teaching Money Skills

So when should we start teaching money to kids? As with many lessons that we need to teach our children, sooner rather than later is the best answer. Most young children (3 to 5 years of age) want to accompany us on our weekly shopping trips. Although they may not really understand numbers at such an early age it still provides an opportunity for you to discuss with your child about how much money you have to spend on that trip, and how you go about determining what is the best value for money on any particular item. It also provides an opportunity to reinforce the difference between needs and wants.

Allowances and Household Budgets

As they get a bit older, say between 6 and 12 years of age, start to provide a weekly or monthly allowance. Ensure that this allowance is a set amount, and is handed over at a consistent time of the week or month. If the allowance is paid over inconsistently, it makes it impossible for your child to budget effectively. Be careful using the allowance for disciplinary means, and withholding it fully if your child misbehaves. This disincentivises your child to budget or save, as they may be unsure if they will receive their allowance on a consistent basis. They may then blow their allowance as soon as they receive it. Provide broad guidelines as to what the majority of the money can be spent on, but allow them discretionary spending on the portion that they save from their allowance. Additional household chores can also be undertaken to provide additional money to them.

As your children become teenagers, start to involve them in the household budget discussions. This is also useful in that they start to understand how much it costs to run a household, and how they can help to reduce those costs. Incentivise them to help keep running costs within budget. Explain to them about the costs of tertiary education, and encourage them to start saving for big ticket items. Explain the power of compound interest, and possibly match their savings rand for rand, say for their first car.

Children are perceptive, and have an amazing ability to absorb information. I try to put this to best use by starting the financial discussions early on. Not only may this secure a sound financial future for your child, but may also remove financial burdens from you as your child matures and enters the adult world.

Netto-Jonker, CFP, is founder of Netto Financial Services and was financial planner of the year in 2001. Her business partner Ian Beere, CA(SA) CFP was the financial planner of the year in 2007.