BATYA SHULMAN, Partner at Select Investors, answers a reader’s question on financial education for children.
All parents want what is best for their children. This is not necessarily the latest tech device or coolest toy, but rather equipping them with the foundation to be happy, fulfilled, resilient, kind, safe and successful in life.
Teaching children about financial literacy and money is a fundamental lesson that every child should learn. It is about helping people make well-informed choices and encouraging financial responsible behaviour. There is plenty of evidence that proves that people who are financially literate are more likely to succeed in life.
Research shows that many of our financial habits are set by age 7*! How many schools offer a comprehensive financial education curriculum at this age? Even when financial education is taught at schools, it should be learnt at home through habits, behaviours and mindset. Financial education needs to be practical application in our daily lives, rather than just understanding theories. It is far more powerful to learn through life lessons than a textbook.
Being a parent to three boys, I have overheard many conversations between my kids and their friends and was truly shocked how often the topic of money comes up. However, it is not always in a positive way.
My son recently came home in tears as he was called ‘poor’ because we did not fly business class on our holiday to Sydney. This called for a family discussion. I started off by explaining how privileged we are with a roof over our head, food on our table, and the fact that we had just spent a wonderful holiday with family back in Australia. We enjoyed quality time with cousins and grandparents, long days on the beach and at the park and ice cream every day (surely ice cream has heavy weighting in the eyes of a 10-year-old?). We spoke about values and what is really important to us as a family; flying business class was certainly not on the priority list.
This incident prompted me to also explain the difference between “wealthy” and “rich”.
And the story goes…
There are two ladies called Jane and Mary. Both successful lawyers. Jane loves designer clothes, shoes and handbags and spends her weekend shopping, pampering herself and dining at fancy restaurants. With Jane’s lavish lifestyle, everyone who knows her considers her ‘rich’. However, what people don’t know is that Jane has no savings and often struggles to pay off her credit card.
Then there is Mary. She enjoys shopping and socialising but does not place value on material items. Mary has been saving and investing her money every month since she was 30 and plans to retire at the age of 55. With the benefits of monthly savings and compound interest, Mary is well on track to reach her future financial goals. This is wealthy.
Being wealthy does not refer to the material things that you own, but what you do with your money. It’s the money that you have saved and invested for financial security, and ultimately financial independence.
My kids enjoyed this story, and it prompted a lot of questions and healthy discussions on what is important in life, including saving and preserving our family values. Having conversations with your children on money and values is a perfect way to start their financial education journey.
Some useful tips and strategies include:
Create opportunities to earn money and introduce rewards and incentives
Everyone values money more when earned than received. This can be doing chores around the house or a reward system for completing certain tasks or achieving certain milestones. Nothing beats some healthy competition to earn extra points and bonuses. My son even asked for a ‘salary increase’.
Place more value on experiences than material items
For birthdays and special occasions, I don’t give gifts but let my children choose experiences that we can enjoy together as family. Giving another plastic toy is soon forgotten, but my sons always talk about their experiences we shared on their birthdays and always look forward to planning their next birthday adventure.
Instil a habit of saving and watch that savings jar grow
Children love to watch their savings jar grow. The simple act of counting the coins and seeing the jar fill up is very satisfying. Saving helps children set goals and plan for things that they may want to purchase in the future. Learning to save isn’t just an essential money habit, it teaches discipline and delayed gratification.
Give them a budget and empower them to make choices and decisions
Giving children a budget helps make them make choices and decisions, and also prepares them for the real world. I recently gave my kids a budget to buy their friend a birthday present. They had so much fun running around the toy shop working out the price of different items. Should they buy 3 smaller gifts or one large gift with the money? They spoke about what their friend would really appreciate and when they had change left over, they decided to buy a birthday card. It was a long but productive and educational morning.
Show the value of giving
One of the key benefits of teaching your children about money is sharing your values and the importance of giving. It is necessary for them to understand there are others that are not as privileged and fortunate as they are. A few years ago, I made a decision that instead of giving goody bags at the end of my kid’s birthday parties, we would donate the money, that would have been used to purchase the gifts, to a children’s charity. At first, my son was distressed that his friends would not understand; they would say it was the ‘worst party’. Very true – young children are materialistic. So, I explained to the parents in advance and asked them to inform their children that they would not be getting goody bags and the reason why. Every year, my kids now choose a charity they want to donate to, in honour of their birthdays.
Role model good financial behaviour
As parents, we need to ‘walk the talk’ and practice what we preach. Kids learn so much more from what they are exposed to on a daily basis and our habits and behaviours are far more impactful than a lecture or textbook.
Discuss wants vs needs
Children naturally want everything; what their friends have, what they have watched on TV and everything they see in the shops. It is important to set limits and boundaries and explain the importance of wants vs needs. Yes, we need food and want ice cream. What is also important to consider is, things that make us happy, are not necessarily things that cost money. We all know the saying “Money does not buy happiness”.
Kids are never too young to learn about setting goals. Write them down, stick them on the wall or the fridge as a visual reminder of what they are working towards. For children, it is easier to set short term goals and start with SMART (Specific, Measurable, Attainable, Realistic, Time-bound) goals. Longer term goals can be set for when they are older.
Introduce the magic concept of compound interest
There is a reason why Albert Einstein called compound interest the eighth wonder of the world. “He who understands it earns it, he who doesn’t pays it”. I have used drawings to show my kids the benefits of compound interest. I am not sure if they have truly grasped the concept, but they seem very excited to see how the money grows year on year.
Educating your children about personal finance is a life-long lesson. If you consistently put in the effort and communicate a clear message about money, you will instil good habits that will serve your children well. That is what I call a good investment!
Contact Batya on Batya.firstname.lastname@example.org or +65 96268576 to arrange a consultation and discuss your planning needs for you and your family’s financial future.
*Source: Dr David Whitebread & Dr Sue Bingham (2013) Habit Formation and Learning in Young Children
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