Are you resigned to the fact that your children are going to live with you well past completing their education? Or are you planning to teach them good habits so that they become financially independent enough to want to support themselves sooner rather than later?
ABS research shows that around 60 per cent of young adults aged 21 still live at home with their parents. Housing affordability is one challenge but how often has the financial tap been left running by parents with no thought to the consequences?
Here are five ways to teach your children the value of money so they can spread their wings sooner.
1. Earning money
When was the last time someone gave you money for doing nothing? Automatically giving children pocket money teaches them that you will fund their desires. Worse, it teaches them that work is not necessary to have money or getting money is easy. Teaching your child to actively participate in age-appropriate chores for a monetary reward teaches them that money is earned through work. Teaching this lesson in their formative years instils good habits that they will hopefully use when they’re young adults.
There is no international convention against paying your children pocket money in return for doing some age-appropriate chores. It gives children a sense of community, independence and the opportunity to be proud of their achievements. Apart from doting over cute pictures of your children and staring at them every night when they are finally asleep, put your delegation skills to work and start to teach them that time is money. Having your children understand this will encourage a healthy work ethic and a good understanding of how money is earned.
2. Investing early
Now that you have outsourced the vacuuming, lawn mowing and window cleaning to your children, it would be unwise to let them have unfettered control of their hard-earned gains. Allowing them to spend all their earnings on lollies at Woollies is not going to increase the price of your Woolworths shares, so don’t encourage the behaviour. Besides, you pay tax on your earnings, and so should you children.
Charge your children an investment tax of around 30 per cent and give them the balance of their earnings. For every $10 they earn, you deposit $3 into a high-interest savings account and little Jack or Ella can have the remaining $7. Once you have saved their first $1,000, you could make their money work harder by looking at some easy robo investment solutions. The power of your children seeing their investment grow over time will help them appreciate what saving and investing can do for them.
These investments can be used in their young adult years to help them buy their first car, be used as spending money for their gap year, or even be contributed towards their tertiary education. More importantly, it could potentially support their move out of home sooner by using the money for a rental bond and perhaps some furniture. My father used the above approach with me and it helped to cover my spending money for my year as a youth exchange student in Sweden. I definitely had an appreciation that it was my money that I was spending.
3. Managing debt
Credit cards are not necessarily bad. Used wisely, purchases made using a credit card, knowing you already have the cash on hand to pay the bill at the end of the month or interest-free term, can provide handsome rewards through the point schemes many cards offer. Children generally learn most of their financial behaviour from their parents, so make sure you are setting a good example with your own credit card use.
Without the value of money ingrained in your child’s mind, they will very likely get a credit card as soon as they are able to. This is a glaringly obvious fork in the road, so pay attention.
Preferably by now you have taught your child that they should buy things they need with the money they have earned, rather than buying things they want, with money they don’t have, to impress people they don’t particularly like. If you haven’t, keep in mind that when your babies turn 18, you have little control if they sign up for a credit card. If they max out their credit card and struggle to make repayments, it is important that you do not bail them out. It may seem like tough love but it is a necessary lesson.
Stepping in and taking over the repayments is enabling behaviour that says if your children are irresponsible with their money it’s OK because the Bank of Mum and Dad will bail them out. It’s not OK and this is a great opportunity for you to impact your child’s financial intelligence by encouraging them to think carefully about the consequences of frivolous spending. The best principle to teach your children is to only buy things that they have money for.
4. Big ticket purchases
A car will often be the first big purchase your children can make. If you are fortunate and willing to buy your children their first car, that is awesome. However, borrowing money at a young age to purchase a depreciating liability is not the wisest move. Running a car involves big payments throughout the year. What will make the difference in teaching your children good financial skills is being clear about who pays for the ongoing running costs. In my opinion, the person who uses the car is the one who should pay all the costs including rego, insurance, fuel and maintenance. If you always cover the large costs of running a car, how will your children learn to budget for themselves?
If you are thinking about making a significant contribution towards purchasing a car for your children, I like the idea of a joint contribution. Ensure your child makes a significant contribution to buying their own car, even if it is $1,000. If they have felt that pain of handing over a large chunk of cash to buy a car, their appreciation for that car will be higher and they will likely take better care of it. It also helps them to realise that growing up involves ongoing responsibility and carefully considered decisions.
Take them to the dealer and involve them in the negotiation process. If you’re not a great negotiator, go on YouTube and search for tutorials. There are plenty of great videos that show the tricks salespeople use. I have bought two cars with my dad. Our strategies involved ‘good cop, bad cop,’ ‘dumb dad, smart son’ or ‘smart dad, dumb son’. We both enjoyed the experience and made excellent purchases by forming strategies together to negotiate the price. These are all valuable lessons you can teach your children.
5. Charge board
When was the last time you earned an income, and had a free roof, free food and free clothing provided? It’s a good life to be earning an income which is 100 per cent disposable to spend on yourself. It is also inevitably what keeps your child dependent on you, well into their 20s and for some, their 30s. It’s not realistic to be earning an income and not having to contribute towards food, clothing and shelter. I hear many parents say they want to help their children save for a home deposit. Good intention. However, reality shows us that the higher the income, the higher the expense. I see a lot of children who live at home with dreams of owning their own place someday with no savings to show for it.
Paying board is a good lesson to teach your children that life has necessary costs that need to be budgeted for before they can go out partying or travelling with friends. A fair system is to require your children to pay a percentage of their after-tax income as board. Thirty per cent is reasonable as most households will spend around 30 per cent of income on housing and food costs. Now, you have two options here:
Yes, you can use that money to help run the household. For some families, this is a big help. There is no way my parents could have raised four teenagers if we didn’t make a contribution to the household expenses. I also travelled overseas for holidays while studying at university, so it was only reasonable that I contributed to the household running costs.
If you don’t need the money, deposit it into a savings account. I think this is a genuine way to help them save without them knowing. If your children work hard and contribute to household costs, it’s a nice gesture to surprise them with a lump sum contribution towards a property or investment.
After all, it is their hard-earned money. You will also have taught them good financial skills to transition to independent adulthood, something they will be forever grateful for as well as it being a rewarding experience for you.
Andrew Zbik, senior financial planner, Omniwealth