In my experience as a financial adviser, I’ve come to realise that parents play a considerable role in moulding children’s financial habits; so it’s up to us to raise a generation of sensible consumers, savers and investors. Not only should we lead by example, we should also take advantage of everyday teachable moments to help children understand money, how it is practically put to use and its limitations.
Spending probably comes naturally to everyone, including children, but the concept of ‘saving’ is something that needs to be inculcated at an early age. This can help them set goals as young adults and work towards achieving their dreams.
What do we know about Aussies and saving
There’s a lot of information online about spending and saving habits, but recently there was a study conducted by UBank called ‘Science of Spending and Saving Experiment’. Their research revealed that 2 million Australians have less than $1000 in savings, 35% did not have a dedicated savings account at all and 46% did not even have a budget!
Why are we so bad at saving money
UBank research shows that lack of savings has a lot to do with the concept of immediate satisfaction versus delayed gratification. The experiment was to show people what they would look like in the future, in the hope that they would think about their ‘future self’ and change the way they spend or save money. In fact, after people were shown what they might look like in the future, 72% of the people were motivated to change the way they actually spent or saved money in order to make smarter decisions for their future self.
How the experiment showed people their future selves
A computer program was used to make the people who participated in the experiment look older than their present selves, and this freaked out quite a few. The primary aim was to get people to visualise themselves in the future and to help them think about finding a balance in their present lifestyle so that they have money to fall back on in the future.
What this means for all the parents out there
It obviously comes back to instilling in your children a good savings habit. The best starting point is getting them to understand the value of money and how to manage it. Talk to your kids and explain that money is something that is earned in exchange for your time, effort and skills.
I once happened to overhear a conversation with a little boy and his father on a train. The boy said, “I really want that toy Dad, I really want that toy!” And Dad replied, “I’ve got no money, I can’t afford it!” To which the boy replied, “Yeah you can, you just have to go up to the brick wall and get money out!” Everyone in the carriage burst into laughter, but the fact of the matter is the boy had no clue where that money came from!
So, it’s really important to explain to your kids that when you’re at an ATM and you see money coming out from that hole in the wall, it’s definitely not magic! They need to know that you worked for that money first, you put it in the bank account and the ATM just gives you the money that you worked so hard for, as and when you need it.
Secondly, you must get them to appreciate the value of money on their own. This could involve telling kids to do some jobs around the house where they can earn small amounts of money. It’s not about doling out money to the kids because there’s no way they will appreciate what they had to do in exchange for that. It’s about getting them into the habit of exchanging their time and their skills even if it involves doing the dishes or making coffee and the like. That’s just how it should start when they are younger. Though you may have to be ready for teething issues in terms of broken dishes, spillages etc. All in an effort to help them learn good habits!
How parents can guide children on what to do with the money they’ve earned
We usually advocate our clients to open a spending account, a savings account and a storage account. A spending account is where money goes in and out, so it’s meant to be spent. A savings account is more long term, and that is to be used for saving money which will be used down the track. So, when talking to kids, it could be about them wanting to save their pocket money for an expensive toy they’ve been wanting for a long time. The money in a storage account is being stored for a particular purpose, so kids could put their money away for one particular thing they’ve been longing for and use it only for that and nothing else.
The next level and some technical points that can be added to this
The next stage is probably to look at a community type of account where 10% of all of the money that they earn is put into a community fund. The intention is to give them an introduction to both tax and charity. So on a monthly basis, you as a family can decide what to do with that money; whether it is left to grow for a specific purpose, if it’s to be donated to charity or if it’s be used for a family activity. That way, when your kids start working, they understand that part of their money goes towards tax, and that tax money is actually used for the benefit of the community.
On another note, when you get past the pocket money stage, parents should encourage kids to get part-time work because it’s important for them to know how to balance their work and their education. Education is obviously one of the greatest investments you can have, but once they’re old enough, it’s really important to get out there, get a part-time job and learn how far money can stretch or how, in some cases, it just won’t stretch.
How kids learn about how to stretch money and tackle the lack of stretchiness once they start working
I remember a job I had working in a fish & chips shop when I was just 16 and I was paid about $5 an hour. I worked a shift that was 4 hours, so I’d make $20 a day. However, the bus trip to get to and from work cost me $5 each way. So I pretty much had to work 2 hours just to get there for the chance to earn $10.
But that job really got me thinking about how I exchanged hours for money. For example, when I was at the shops with my friends, buying lunch was about an hour’s worth of work. If I had to go to the movies that was about 3 hours plus of work just for me to be able to do that. So, it really taught me to appreciate money and understand how much work I had to do, to be able to pay for the things I wanted to do.
How to encourage them to save some money and get the right habits in place
The psychology is that it’s easier to spend money on a card than it is to hand over cold hard cash. But, when you’re teaching kids about money and setting them up for the future, there will come a time when they will have to responsibly handle cards. So, you need to teach them good habits with both cash and electronic money.
If your kids are young and you’re dealing with smaller amounts of pocket money, then jars could be used. Just make sure you’ve got their jars labelled and the purpose of the jar is respected. Once your kids are a little older and it’s time to go electronic, you should think about opening a bank account and directing their pocket money towards that account. You can keep track and show them their account activity and balance by using a spreadsheet or by tracking it on apps.
Apps that can be helpful for kids
The app I’ve seen is called Spriggy and it is linked to a pre-paid card. It’s available for kids from 8-18 years old and is designed so that parents can help their kids manage their money together. The app makes it nice and visual, helps kids set savings goals and allows them to track the transactions. This is just one that I’ve seen, I’m sure there are more out there because there’s a growing market for it. I feel this could be really helpful for parents to talk to their kids about what the purpose of the money in the savings account is for.
Kids and budgets
While they’re still receiving pocket money, kids may not have to consider a budget because they don’t really have fixed expenses that need to be budgeted for. However, once they get a part-time job, that’s the perfect time to get them to start thinking about writing up their own budget. With the new level of responsibility and independence, they should be able to think about the money they’re earning and how they want to budget it by deciding what they want to spend that money on.
Other concepts we should be mindful of
It’s really important that we address the concept of delayed gratification. You’ve probably heard of the famous marshmallow test, where a room full of 4-year olds were told that they could have a nice big fluffy marshmallow right now, or if they waited patiently without eating it, they could have two later on.
What they found is that the kids who were successful in this experiment were successful because they distracted themselves. That was pretty much the key difference between the kids who sat there looking at that fluffy marshmallow and ended up eating it than the others who sang songs, looked around the room and did other things to just distract themselves from wanting to eat that marshmallow.
So, when that comes to kids and their use of money, it could be about whether they want to spend $5 on a bag of lollies right now or whether they want to save that money up so that they can buy a more expensive thing later on. That’s the kind of conversation you could be having to drive home the concept of delayed gratification.
It may be a tough choice for kids, but it does get them to think about it. It doesn’t mean that if kids always choose the $5 lolly bag because they are unable to delay gratification that they will be unsuccessful in life. It just reinforces the need to have that conversation about what would happen if they waited to have $20 in hand to get something more worthwhile. And when you repeatedly ask that question in different ways, you may get a different response over time.
Another way of handling this is to play on the active imagination of kids and get them to think about what they want to be when they grow up. Even if it’s a response as funny as, “I want to be a Power Ranger,” you could make a teachable moment out of that and tell them how Power Rangers would need to save up money for their costumes and gadgets to help them fight the bad guys! This is just to help them understand that a little bit of sacrifice today will help them later on. As parents, if you can get your kids to start exercising that skill of delayed gratification, you’re setting them up for success at school, work, within their relationships, finances and even health!
To summarise, I think it’s important to encourage kids to learn the value of money by working for it. Once they start earning small amounts of money, which may be pocket money, parents should talk to them about how to manage that money. Then introduce your kids to the concept of budgeting, setting up spending, savings and storage accounts. Once they’re old enough, encourage and support part-time work and help them hone the skills of delayed gratification over time. Do that and you’ll definitely be raising a sensible consumer and saver!