Here’s a fact for you - if you’re 30, and you want to save $200,000 by the time you’re 60, you’ll need to put $46 per week away into an investment that pays you a net 6% per annum. $46 per week, which is roughly $200 per month. But if you start when you’re 15 years old, you’ll have to save less than $17 per week - around $72 per month, or only slightly more than a third the amount - to reach the same goal.
I like this fact because it nicely illustrates one of the most fundamental and powerful forces in finance and building wealth - compound interest. This is a hypothetical example, obviously - for starters, your earning potential is very different at age 15 vs age 30, and its pretty unlikely that your savings plan is going to stay that simple throughout your entire life. But it does neatly illustrate the core concept - the power of compounding - in a simple way.
And it’s also a great way of starting to highlight another powerful concept - that the more time you have to achieve a financial goal, the easier it’s going to be to get there. And I think thats a great way of highlighting that when it comes to money, the earlier you start, the easier it’ll be.
In 2021, the Ecstra financial wellbeing foundation in Australia surveyed over 2000 students ages 10-17, and their parents and teachers, to understand the attitudes towards financial literacy, and the capabilities that parents and teachers had at hand to help develop their kids financial skills. A few things stand out clearly:
- Everyone agrees that learning about money and finance is important. Nearly 95% of parents and teachers feel this way, and nearly 90% of kids do too. At least half thought that this had become more important since the Covid pandemic.
- Well over three-quarters of parents and teachers thought hat financial education should be delivered in schools.
- Over two thirds of students wanted to learn more about money at school.
But even with these high levels of interest in the subject, only 20% of students felt they had high levels of knowledge in money matters - and nearly half of students thought their knowledge levels were low overall. Which wasn’t that surprising - as over half of teachers had never taught financial concepts at school - even if many of the students did discuss money matters with their parents.
For parents, this is clearly a challenge - while its great that many families are discussing money and finances, and kids are getting some exposure to these topics, parents themselves often lack some of the core knowledge, skills, and resources, or even sufficient free time, to ensure that children widely are getting a solid and consistent grounding in finances in a way that will positively impact their lives over the long term. In particular, saving money and planning for the future, buying property, budgeting, effectively managing debt, and being aware of the risks of financial scams and high-cost debt traps are all areas that parents want to ensure that their children are equipped for, but aren’t confident that they can do so effectively. And the same challenges apply for other sources of information that kids often turn to to help with financial decisions - their wider family, their friends, or most commonly today, online.
So what should parents do? Well there are some basics that every parent should be thinking about and don’t require a sophisticated financial background.
Teaching kids the value of money
For many people, the best way to learn is to do, and the best way to teach kids the value of money is to put the decisions and control in their hands. Earning their own money, and making their own decisions on how to spend it and use it, can go a long way to learning about consequences of your actions and the benefit of delayed gratification. Kids earning money on a small scale, such as for chores around the house, can go a long way to associating effort and reward from a young age.
I also suggest opening a bank account for kids and any income they receive be paid to that too. Try setting aside some time every month to sit down with the kids and talk through their income - what they earned, how its been aging up, what they have spent money on, and what goals do they have for the future? Keeping children actively engaged in their own finances, helping them make their own decisions about what to do with their money, and even letting kids make their own mistakes can help them learn the benefits - and consequences - of their actions from an early age.
Involve kids in the family finances
Just as giving kids a way to manage their own money can help build good skills and habits at a young age, so can involving them in the family finances too. Talking about money decisions and giving kids insight into things like regular bills and expenses, the cost of the weekly grocery trip, the cost of smaller expenses and luxuries, can also help build awareness of the tradeoffs involved in financial decisions. The same applies to savings - if kids can see how savings builds up over time (this works particularly well with KiwiSaver savings, and also has the benefit of getting parents more engaged and motivated in their savings and investment decisions too), it starts to build awareness of concepts such as compounding interest and the benefits of delaying spending into the future.
Another long-term benefit of having the whole family involved in financial decisions is that estate planning can become a lot easier due to increased transparency and awareness of risks and financial scams and threats.
Kids and debt
As kids get olds and become more independent, it’s important to stay involved. In particular, it’s important to be aware that kids can get into debt too. Buy now pay later, store credit, credit cards, bank overdrafts, even payday lending are all becoming much more tightly regulated - but even things like a cellphone bill that goes unpaid too long can have a negative effect on financial outcomes in the short term. Being aware of the potential risks of debt, and open conversations about debt, particularly when children are taking on debt or holding a cellphone account in their own name for the first time, will help kids make sure they’re aware of the risks and consequences of things going wrong.
Putting money aside for the kids
Parents often want to know how they can support their kids more directly - for example, by helping save for a first home deposit, or helping with university costs or gap year travel. Make sure you’re aware of the pros and cons of different savings tools out there - here’s just two examples:
- Savings sitting in cash will earn the lowest long-term average annual return available. If your children are young, and you don’t plan to gift funds until they’re in their late teens or early 20s, you will probably save significantly a higher amount by investing the kids savings instead of just putting it in the bank.
- KiwiSaver funds can be used to save for a first home, but not much else before retirement. KiwiSaver funds can only be accessed in specific circumstances - they can’t be used to cover education costs, for example. And if your kids are working before they’re 18, their employer doesn’t have to match their contributions, and they won’t receive the annual member tax credit - so these benefits of KiwiSaver won’t be available to them either. Often, a simple diversified managed investment fund may be more appropriate.
Looking after your own financial situation
First and foremost - one of the best things you can do to support your children financially is make sure your own house is in order first. In particular:
Make sure you have an estate plan in place - even if it’s just a simple will for you as parents. 50% of Kiwis don’t have a will, which can lead to severe hardship if tragedy strikes. Consider putting in place a personal insurance policy that covers some of your income, and provides some lump sum cover if you’re affected by a death or severe illness or injury. And make sure you’ve got your own financial goals and plans in place - and that you’re saving and investing at a sufficient rate to achieve them.
Hopefully this gives you some ideas on how you can easily help your children build a more solid foundation of basic financial skills and comfort with money. Money and finances is one of the leading causes of stress and anxiety for a lot of people, and being more open about it with your children, as well as equipping them with some tools to help them with their own money in the long term, can go a long way to improving financial outcomes for all Kiwis.
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Thomas has offered to answer any questions you might have in an Instagram Story Q&A - if you'd like that, please leave a comment below so we can gauge interest and look at scheduling it in soon.