(By René Roux, Head of Distribution Marketing at Sanlam Personal Finance)
Every day, we have to make financial decisions, whether big or small. Without the financial knowledge required to manage money effectively, it is more difficult to stay out of debt, grow our wealth, protect our assets and live comfortably from pay check to pay check…
Parents have an opportunity to empower their children from a young age with habits and knowledge to make smarter financial decisions and display positive financial behaviour as adults. This could ultimately contribute to their future financial security and peace of mind.
These are some practical tips to get parents started:
1. Lead by example
Many of the perceptions, skills and attitudes children have about money are learnt in the home. Children tend to mimic the behaviour of others, so parents need to carefully consider how their own financial behaviour and attitudes will influence their kids. To raise financially responsible young people, parents should make financially responsible decisions and help children understand their reasons for taking these decisions.
2. Show the difference between a need and a want
Parents play a key role in teaching children how to differentiate between a ‘need’ and a ‘want’, how to appreciate the value of money by having opportunities to ‘work’ and ‘save’, and how to make adjustments when necessary. By understanding the difference between a need and a want, young adults are able to better prioritise their spending in terms of which expenses need to be taken care of immediately and which can wait until later.
3. Allocate extra chores for extra funds
Some parents may not agree with the idea of paying kids for chores that they should be doing anyway, like packing away their toys or making their bed – which is understandable. However, there may be extra chores which could be incentivised with cash to teach children to become more resourceful – a skill that could stand them in good stead throughout life.
4. Demonstrate the effectiveness of budgeting
Once you and your children have a good idea of how much they earn during a week or month, help them to create a budget. This is particularly relevant for kids who are a little older. The budget should be collaboratively drawn up as a fun and exciting exercise. This can be done in a very visual and simple way that’s easy to understand. Track the budget together, and when variations arise, discuss how to make adjustments to get back on track or to earn extra money to cover the shortfalls.
5. Encourage saving
Help your child understand the importance of saving first, and spending later. Inculcate a habit of first setting aside an amount for a future goal before taking care of immediate needs. An important lesson to teach kids is that of patience, as opposed to instant gratification. When your child wants something he or she can’t afford, encourage him or her to save for it. Do the math to demonstrate how saving larger amounts will get them closer to the desired item sooner. Devise visually-driven exercises to make saving fun, such as a transparent money box for younger kids and a bank account for an older child, so he or she can transact online to easily monitor spending.
6. Encourage your child to get a head start
There are many useful resources that explain the benefits of starting to invest early in life, and, in particular, the benefits of compound interest over time. Often, we hear about the frightening statistic that 94% of South Africans will not be able to afford to retire comfortably. The most effective way for your child to work towards being part of the 6% that will be – or contribute to growing this statistic – is to save a suitable amount consistently over time and to start early.
Besides having greater financial peace of mind, adults who earn and save contribute positively to the country’s GDP, thus reducing the strain on government to provide social grants, and potentially playing a strong role in breaking the cycle of poverty.
Also remember that with 41% of households being female-headed, it is becoming increasingly important to empower both girls and boys with the knowledge and skills to manage their personal and household finances when they become adults.
Some of the most profound gifts parents can give their children are peace of mind, opportunity and confidence. With the right knowledge and skills, kids are better empowered to be self-sufficient and thrive whether or not they are on their own.