Teaching good financial habits, such as saving and budgeting, is one of the best ways to prepare children to have a secure financial future. Helping kids establish sound money management skills and strong financial acumen is important, regardless of wealth level.
A great way to begin to teach younger children about money is to explain its value and its function in the world. Kids often focus on rewards-based systems, where they earn a reward for good behaviour or academic achievement. Use this time to teach them how to earn money as a reward and divide it into 3 categories: spend, save, and give. For example, spending may be related to buying a fun treat or toy, saving could be taught as a way to buy something they really want in the future, and giving is how you help those in need.
Tip: Sometimes when sharing the concept of saving with your child, it can be helpful to explain you're “paying yourself for something fun in the future” and relating it back to an age-appropriate concept they can understand. You can make tweaks to this activity along the way. For example, if your child puts extra money into their Saving jar, you could provide a few additional dollars to help them understand compounding interest—how saving money can help them earn more over time. If they receive money as a gift for a holiday or celebration, bring out the money jars for a refresher. Repetition and reinforcement become important in learning any discipline, especially money management skills.
Parents often associate the tweens and teens as the years their kids desire more independence and more options. In this case, tying money management and financial literacy to something relevant in their lives can help keep them engaged. For example, many young people are interested in gaming, so try to relate investing to playing a game. Before they start the investing game, provide them with an overview of the concepts of shares, bonds, and cash, and how they operate differently, like different players in a game. The different players in the game all act together to form an investment strategy. Depending on a child's age, engagement, and appetite for these discussions, consider introducing the concept of building model portfolios. Review model portfolios that show different asset allocations, and then have each family member choose a portfolio. Once a family member chooses a portfolio, discuss what stood out to them about the portfolio. This will help reinforce the importance of asset allocation and diversification.
At this stage, they may be ready to digest more advanced topics. Discuss the importance of goals-based investing by asking them to think about the next big purchase they want to make—are they saving for a car, a down payment for a home, or even setting aside money for future retirement? Ask: What is their time frame for that investment? When do they want to reach that goal? This helps teach the importance of time horizon as it relates to investing; the longer a person has to save and invest, the greater the likelihood for success in reaching their goals. Depending on their current situation, they may also have student loans to pay back. Budgeting may become a critical topic at this time, and sitting down with them to create that budget can be helpful. This is another important component of financial literacy and money management, and attaching it to an important life stage can make it all the more relevant.
It's never too early or late to start talking about money with your children — start as soon as you are comfortable to and make learning as relevant to their age and life stage as possible.
If you'd like more investment tips and guides, visit Vanguard's client education centre.
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Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.
Financial Advice Sydney and the North Shore Office based in Gordon NSW