With lockdown under way in South Africa and extra time with your children, grab this opportunity to spend some of the time teaching your children about money.
As we know, the savings culture in SA is pretty poor. This difficulty seems to be compounded when we attempt to introduce our children to this concept. Talking “money and saving” to a generation that has an “instant gratification” expectation is challenging.
Coupled with this, the ease of payments that use online payment portals and apps like eWallet means that money can be used and transactions completed without our children physically touching bank notes and coins. This makes money quite an abstract concept for them and the younger they are, the more difficult the abstract is for them to grasp.
As parents and guardians, we ought to be the ones who introduce our children to money. Yet we are often caught in the middle between the previous generation which often wasn’t comfortable discussing money with us when we were young, and the need to introduce our children to a financial world that we as parents may not even understand. Parents nowadays thus have to navigate this minefield with our children on a “trial-and-error” basis.
So, as we try to help our children with the concept of money, we should look to cover the following aspects:
Introduce the concept of money to your children as early as possible
You really can’t start teaching your children early enough, as long as you make sure that what you are saying and the type of interaction is age appropriate.
From about the age of three, children can start to understand that you need money to buy things. They can learn what coins are and what paper money is, the different denominations and so on. Remember that from the ages of between two and seven, children represent ideas with words and images, but lack logical thinking. From seven up to about eleven years old, children develop logical thinking, grasp concrete analogies and can perform basic arithmetic operations.
As they grow older, so they can go through various lessons, from playing shop, to having to deal with pocket money and real shopping, all the way through to much more complex concepts such as budgeting, debt and investments when they are teenagers. From the age of about twelve, they demonstrate abstract thinking including logic, deductive reasoning and comparisons.
Introduce the principle of earning their money
One of the best ways to begin teaching the value of money is to link an allowance to chores. Again, this can be started from a young age – even pre-school – as long as the chores and pocket money are suitable for the child’s age.
There are several ways to structure allowances. You could, for instance, create a monthly “salary” that is paid for ongoing chores that are undertaken throughout the month.
You could also implement a “commission-based” allowance that is paid as a once-off amount for completing a specific task.
You could also use a combination of these, depending on what works best for your child and your circumstances.
Teach children the value of money
Ask your children what they think things are worth and discuss this with them. Consider the trade-off between cost and quality, and when it is worth spending more for quality and when it isn’t.
You can compare prices of items with older children. If you are shopping for something new, ask your child to help look at sales flyers or search for the best deal online.
Children can also learn from their own experiences, and this means standing back while they make poor decisions.
It might be difficult to watch your child run out of money or spend unwisely, but the best lesson is when they learn it first-hand. They will be then be less likely to repeat it when there is more money at stake in the future.
Investment vehicles suitable for children
An excellent option is the tax free savings account (TFSA). While anyone can invest up to R36,000 a year in a TFSA, they can equally invest much less. It would a little over 13 years of investing at the maximum to reach the current cap of R500,000, so starting early makes sense.
There are a host of suitable unit trusts or collective investment schemes, stocks or shares, and exchange traded funds (locally and globally) available – perhaps too many to discuss here. Look for something that will match your child’s longer-term needs, as well as their ability to tolerate risk. If necessary, seek professional advice to help you navigate through the sea of options.
Investment strategies for children
Talk to your children about the risks and rewards of each of the asset classes and include a conversation about not putting all of your eggs in one basket, i.e. diversification. Explain how investing is a way of using money to generate more wealth – how compound interest works, what income is generated from each different type of investment, and so on.
Explain how some investments are safe (with capital guarantees), and others mean you could lose everything. You should also discuss the expected duration of the investment with them. Let them discuss their feelings about risk and reward.
Involve children in the investment decision
Involve your children in making investment decisions as much as possible so that they start to understand the basics of investing. As you receive performance metrics, you can use these to explain how investing helps to create more wealth. At the appropriate age, explain to them how the different investments work. For example, if they own shares in a listed company, what that means and how it works.
Later on, let your children take the reins and invest themselves
Once your children have mastered the basics, or understand how money is earned and saved, how to budget and so on, it’s time for them to learn to invest and to create wealth. It is only through investing that we can teach our children to become financially independent for the future. This should happen any time from the age of around fourteen or fifteen when they are able to conceptualise their decisions. Let them take responsibility for some of their own investment decisions, although certainly not all decisions.
Don’t forget about philanthropy
It is useful to build into your lessons about money that charitable giving should also be a part of their monthly budget. It’s an important concept for children to learn about, and starting early will build it into their consciousness. This develops a sense of empathy for others, and an understanding that everyone deserves respect.