In these fast-changing times, it can be daunting for parents to think about what they should be teaching their children for an unknown financial future but, when it comes to money, some old-fashioned lessons will be applicable in most scenarios.
It’s crucial to teach children to respect money from an early age, says Brett Mackay, Investment Consultant & Group RA Manager at 10X Investments. “Buy them a piggy bank, set up a savings account early, and help them to save and spend their own money.”
Mackay believes pocket money is a good thing and can be used as a “tool for learning about saving, budgeting and even delayed gratification”. But, he says, there should be reasonable limits and firm rules.
“Children should know that when their pocket money runs out, it runs out … unless of course there is a way to earn a little more by taking on extra chores around the house or garden,” he says. “By encouraging your kids to earn money through work you are also teaching them the value of money.”
He says he is grateful that his parents taught him some key lessons about money, but wishes they had introduced him to slightly more complex concepts, such as building a share portfolio, or investing in index funds for low-cost long-term wealth creation.
He suggests that parents set up a Tax-Free Savings Investment for their children as soon as they are born. This will give them a great start in life as they will have many years of compound growth ahead of them.
“Ideally, aim to invest as close to the maximum annual allowance of R36,000 as you can manage, and make sure you are not losing a disproportionate amount of the growth to high fees, and are investing into broad low-cost ETFs rather than just using your bank.”
Mackay adds: “Talking to your children about this investment account will give you an entry into a number of key topics and areas: taxation, reading the small print, compound growth, investing, keeping an eye on costs – to mention but a few.”
He thinks parents should talk to their children about the importance of taxes too.
“It is helpful to understand why we pay taxes and what to expect when you start working. Some people never understand taxes, why we pay them and why certain expenses – such as saving for your retirement – attract tax relief. It is a real pity that many taxpayers never get the leg-up that tax incentives provide because they don’t ever experience them.”
He adds that, especially in our credit-mad society, parents should teach their children that credit/debt has a role to play in a responsible financial plan, but its use should be managed carefully. The lesson here is that, while money has value, it can’t buy you happiness.
“We all need to understand the difference between big, value-adding purchases, such as an education, a home or even a car; and nice-to-haves, like dinners out and new clothes. The earlier you start to understand the difference between what some people call good credit and bad credit the sooner you can start making good choices for yourself.”
Another good habit parents can pass on or teach their children is budgeting.
“Once they start earning money they need to know how to budget. By creating a budgeting plan they will find it far easier to keep track of how much they can spend and how much they can save.”
Finally, Mackay adds, parents should teach their children the importance of being prepared for an emergency.
“Having some funds that you can access quickly when you or someone close to you gets into trouble will give you a lot of confidence, as well as some choices and comfort at a difficult time,” he says. “Having access to emergency funds also means that you don’t need to take money out of your investments, which could have a negative effect on the compound growth.”
Even if money changes drastically in the future and we start using alternative currencies, or even different systems, says Mackay, “it is important to teach your children about good financial habits”.
“Making informed choices about budgeting, spending and saving will set them up to avoid the mistakes that so many South Africans have made before and are still making today.”