Ask An Adviser - How Can I Teach My Children Good Financial Habits? (2)

Top answer provided by:

Aadil Abbas Lakdawalla

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Hi Effie,

Thanks for your question. 

Firstly, I’d like to congratulate you on proactively thinking about having the money talk with your kids. Research has consistently shown that our attitudes towards money, savings and spending are shaped during childhood. 

In my opinion financial literacy is an essential skill in life which unfortunately is not given as much priority as some other life skills when we are growing up. This results in many of us being left to our own devices to figure things out later in life when it comes to money and mostly through trial and error – which maybe a costly way to learn!

The below areas would be my suggested areas to cover as first steps in building your kids financial literacy.  

Budgeting

Firstly, I’d introduce them to the idea of a setting a budget. If you have a household budget maybe walk them through it so they understand how a budget provides insight and transparency into the household income, spending and savings.

If they are already earning some pocket money or getting an allowance for chores, then getting them to create their own personal budget can be great exercise in learning about money and finances. 

Through budgeting you will be able to introduce concepts such as creating spending and saving buckets. Showing them how the household expenses can be categorised into essential expenses (e.g. groceries, rent/mortgage, transport, etc.) and discretionary expenses (e.g. holidays, entertainment, eating out, etc.) will help them understand that everything costs money and that trade-offs may be required to stay within budget.

I suggest you also discuss the idea that a budget needs to be reviewed regularly to ensure it is an accurate picture of personal finances.  This will allow you to make money and finance a regular conversation with the kids.

You may find MoneySmart’s tips on how to do a budget a good way to have this conversation.

Savings and the power of compounding

The idea of saving is a critical concept to introduce to the kids. However, we first need to address the psychological barriers which prevent most people from saving regularly.  Psychologically, when you save it means you are denying yourself instant gratification and having to make a trade-off in the present for potential future benefit. This desire of instant gratification, I’m sure you’d agree, can be hard even for adults to control!

I think there is a better way to have this conversation about savings and for that I suggest that you start by understanding things they’d like to buy/spend money on now or in the future (e.g. a new video game, their first car, etc.) or experiences they’d like to have (travel overseas).

Next, put a number against what this might potentially cost and how their current budget and spending habits may or may not allow for this dream to be realised.  By tying the idea of saving to achieving a future goal, you have now given them a framework to make a decision in relation to spending and saving money today.

Having established the need to save, you can then use this compounding interest calculator to show them how they can use the power of compounding by making regular savings based on their budget to help them get to their goals faster. Einsten is often quoted to have said, “Compounding is the eighth wonder of the world,” and I couldn’t agree more!  

By introducing the idea of savings and the power of compounding, the next time they want to spend on something, you can remind them of how it might impact their savings and the impact it would have on them reaching their goal.  Or maybe you already have a regular savings plan for them and they need to decide if they wish for you to spend money now or continue saving for them.  

It will then be their decision, then they decide to spend or not, and not you! I feel like this may end up being a win-win all round for your family!

Superannuation

Most of us, I’d argue to our own detriment, are not engaged with our superannuation fund until much later in life. It may be hard to believe this, but our superannuation system is consistently ranked as one of the best in the world when it comes to retirement savings.

I am a firm believer that giving the kids a primer on superannuation, should form part of any financial literacy conversation.  

Super is a great way to again illustrate the power of compounding through regular contributions. 

A key reason, I believe, for our collective disengagement with super is because most of us can’t access the money for a very long period of time. However, it is still our money, and we have full control over where and how it is invested.  It is critical that kids realise this as well - that money in super is their money once they start earning, even though it may not be available to them for a very long time.

Another potential way to get them more interested in super and develop long term engagement, would to be discuss with them that through super they have the power to invest their money in line with social causes they care about such as climate change or ethical investing.  We all know how most kids these days are pretty switched on when it comes to social justice, equality and climate matters.

This easy to read primer on superannuation basics on the ATO website - will provide guidance on key concepts to discuss with the kids. Maybe you may learn a thing or two as well!

Leading by example

Finally, I believe the best way you can teach your kids about money and finances is to lead by example.  Our kids watch and learn so many life skills, behaviours and attitudes from us and it’s no different when it comes to money and finances. Take a moment to think about how your parents’ attitudes towards money may have influenced your own attitudes towards money and finances.

I’d encourage you to involve your kids as much as possible in your financial decisions by giving them context and explaining the choices are you making when it comes to your household finances.  

Putting into practice some of the principles we’ve discussed above and involving them in your household financial decisions will be the best education they will ever receive when it comes to money and finances.

Effie, I hope the ideas and suggestions here help you get started in teaching your kids about money and finances. You’ve already made a start by thinking about it, so time to put this terrific idea into action!

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Article by:

Aadil Abbas

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