What are some strategies to help prepare your children’s financial futures?

Welcome to Finance and Fury, the Say What Wednesday edition. This week’s question is from Ruby.

“I was speaking to my husband and we want to help financially prepare our children and I am just wondering if you have any strategies to help with this?”

Thanks for the great question – Depends what you mean by preparing for your kids financially –

1. Two ways to view this –
   1. the monetary side – i.e. them having access to funds or having expenses covered for
   2. how they value money – which comes back to the financial education side of the equation
2. In my view – giving kids all the money in the world without the educational side can set up children for a worse outcome in life – without understanding value of money it can create –
   1. Talked about how to do this in a previous episode – Why is talking to your kids and family members about money so important? – where it was mainly about misconceptions – and using monopoly as a good tool as opposed to the zero-sum game it instils

How to educate children financially – As a parent, you have the power to shape your child’s relationship with money – many things that can be done to help improve their financial education

Why –nobody else will help to confer this information and thus Teach them about value of money – Kids don’t understand value of not just money as a medium of exchange – but that their time has valued attached to it – I don’t think some adults know that either

1. Financial education for younger children is all about Instilling the value of money– one of the best ways to secure their financial futures – slightly different to a form of financial education that an adult would have – teaching asset pricing models, etc.
   1. In a way – if you can cover the basics – this education is better than a gift of money –
   2. You could give a 15-year-old $50k – but if they don’t understand money – then this can be gone very quickly – however – if they understand money – this could be a great step in the right direction
      1. One of the best gifts that I received was this form of informal financial education
   3. Can be hard for kids – they are essentially socialists – thinking that everything should be free at younger ages –
      1. Everything is technically free to them – the younger they are – everything is normally provided for them

How to do it

1. First major step is just talking to your kids about money – You don’t need to be an expert to teach kids about money
   1. There is a taboo surrounding talking to kids or anyone about money – some people think that it is rude
      1. Depends on the intent – if someone comes up to you and asks how much you earn or have just to brag that they have more – that would be rude
      2. But talking to family – or even friends about money – if the intent is right – then that shouldn’t be shunned
   2. Just start a conversation about money when the opportunity comes up at home or when you’re out
      1. These chances will come up all the time –
      2. Your kids will naturally ask you for the things they want. It’s hard when you have to say no. Talk about how we all have limited money and we need to carefully decide what we spend it on

• One client had a good strategy for this – her daughter really wanted to go to uni – so we were setting up education funds

1. If her daughter asks for something at the shops – then she lays out the opportunity cost – that the money would otherwise be going towards university costs for her –

1. This can help kids to understand that money can be finite compared to wants –
   1. Wants versus needs – the economic problem – how to maximise utility with finite resources
   2. Whilst income and wealth can grow – it is technically finite compared to the potential for unlimited wants that people can have
2. This conversation can expand to the concept of how you earn money – the exchange of your time at work for money
   1. The concept of priorities can come in here – where you have to spend time working to provide
3. Reinforcing needs versus wants – all about priorities –
   1. Break down goods into essentials – housing, food, bills, clothes – there is always a choice –
   2. Have your kids make some choices – discussing the differences between needs and wants –
   3. If you ask your kids once they can comprehend the differences – should be spend money on keeping the house (through mortgage repayments) or on new toys?
      1. Gets them to think about money –
   4. To reinforce the concept of essentials versus wants – can help through explaining where money gets spent –
      1. Going through the weekly budget – Use everyday situations to teach your kids about money, including where it comes from and where it goes
      2. When out shopping – can teach your kids how much things cost by showing them
         1. different prices for similar items, how to compare deals, how to work out which items are better value, how to work out price differences and discounts
         2. If you have the time – which if this is important – there should be time – ask them which item is better to buy?
      3. For the essential expenses – talk to your kids about bills and expenses –
         1. Relate this back to the concept of exchanging time for the money – how many hours did you need to work to pay for these expenses?
         2. Helps to further reinforce the concept of value of money – that it isn’t free and that spending decisions have consequences –

• For example – if you worked 5 hours to cover the quarterly electricity bill – and decided to use that money on some grown up toys instead – then the lights wouldn’t be on – that wouldn’t be a very responsible decision

4. This is all about getting your kids involved in making money decision
   1. Can extend to other things around the house – but as your kids get older, get them involved in budgeting, saving and spending
   2. Have them do a budget for themselves – or sit down whilst you do yours
   3. Help them put a budget together – especially if they are at an age where they are either earning their own money or earning pocket money
5. Brings up the concept of pocket money – shouldn’t be just giving kids pocket money – but them earning this – to reinforce the time value of money
   1. Child labour is only illegal if it isn’t your own children – bit of a loophole here – but all jokes aside –
   2. Having your children help around the house in return for pocket money can help them to understand the value of money – as well as understand the concept of time and effort in exchange for a monetary rewards – i.e. an income –
   3. You can choose to pay them for certain tasks around the home – plenty of chores to choose from
      1. As an example –
      2. mowing the lawn, vacuuming the house, washing the car, taking the rubbish out, cooking dinner or making school lunches, hanging out and bringing in the washing, packing and unpacking the dishwasher, walking the dog – place a monetary value to each – and they get pocket money for completing each

• here I might suggest against doing this for doing homework – up to you

1. Either way – make sure you withhold or reduce their pocket money if the tasks are not done or not done properly
   1. teach kids that they only get paid when work has been done to a certain standard – value – exchange of money for services rendered
2. At this stage – you can bring in the reinforcements of encouraging kids to save – once they are earning their own incomes – either through pocket money or if they have their own jobs
   1. Learning to save is a vital money lesson.
   2. Piggy banks and bank accounts – Piggy banks are great for younger kids. They can see the money they’re putting away and watch it grow as they save. Opening a savings account is a good way to introduce kids to banking, saving and interest.
   3. Set money goals – Help your kids avoid impulsive purchases by teaching them to set goals and to prioritise what they spend their money on. When your child wants to spend money on an impulse purchase, remind them about the goal they are saving for. Work out how much longer they’ll have to wait to reach their goal if they decide to spend today. Get your kids to work out how long it will take them to reach their savings goal or to save up for something special.
   4. This is a time where the basic concepts of supply and demand can be taught as well
3. On top of this – if you have set up investment structures for your children – covered this in another episode – called How to best invest for Children or Grandchildren?

You can break this information education down into different stages

8. Start introducing some concept to children around the ages of 5-8: Needs and wants – Kids consider the difference between needs and wants.
9. Start giving some chores at the ages of ages 8-10 – have savings accounts set up for them and all them to set budgets – decide between needs and wants, create a simple budget and learn about making wise financial decisions. 
10. By around 14-16 – they can start making their own spending decisions – would likely have some funds saved up by this stage – so if they want something bought for them – they always have the option of purchasing this for themselves
11. From 15-18 – they should have a good base – getting their first jobs outside of chores in the house
    1. Having to look into things like incomes, taxes, super accounts, etc
    2. Help prepare them to move out of home as well –
       1. When older kids get their first job, they’re often tempted to spend all their money at once. Show them how to track their spending to see where all their money is going.
    3. Also – a good time to start talking to them about what they would want to do to earn an income – what they would be happy to do – exchanging their time in return for money for

In summary – no correct one way to do this – these have just been some tips –

1. The most important thing that you can do is provide kids with a financial education – they aren’t likely to get a better one than what you can provide
2. Help them understand the value of money – not just as a concept but by living it – working for pocket money and allowing them to make their own spending decisions

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