We want our kids to grow up confident with money. Brenda Ward talks to the experts about giving children the skills they need to create a rich financial future.
By the time Kiwi kids are eight years old, about 80 per cent have already developed spending and savings habits, says research from the Young Enterprise Trust.
Have you already missed the boat?
If little Johnny and Jenny are already blowing all their pocket money on lollies at eight, that’s bad news. They could struggle with debt all their lives, and find it difficult to save for a house deposit.
But if they’re watching the coins growing in their money jar towards a holiday treat, you’re probably setting them up for life-long savings success.
One of the most important skills you can teach a child is to make them financially capable, says Dr Pushpa Wood, who heads the Massey Fin-Ed Centre.
“If you want to introduce children to the whole notion of money and their relationship with money, the earlier you start, the better equipped they’ll be.”
Don’t see pocket money as a given, or as a treat, say the experts. See it as a learning opportunity.
Wood says not to give pocket money to children until they understand the value of money, and perhaps not at all, if you can’t afford it. She wasn’t given pocket money.
“My parents’ question to me was, ‘What do you need pocket money for? When you need something, you can come to us and we’ll provide it’.”
Kiwibank’s Mark Lonergan suggests linking pocket money to chores.
“You earned it, it’s yours. It’s more what life’s like – you do something and then you get the reward for it.”
Simon Brown, chief operating officer of school financial education platform Banqer, says: “Some parents encourage kids to save, share, and spend a portion of their pocket money.”
He suggests putting the cash in three glass jars, so they can watch it accumulate.
Wood says in some Asian cultures investing is a priority, so it’s common there to split pocket money four ways – a quarter saved, spent, shared, and invested.
The million-dollar question
If you’re going to do it, how much pocket money should you give your children?
First, talk to your kids about ‘wants’ and ‘needs’ – and the difference between them, says Wood.
Set an amount and stick to it.
“I had my 10-year-old coming to me and saying, ‘But everybody in my class has this much. Why am I not getting that?’
“As soon as you start giving in to that notion, what you’re doing is encouraging them to start comparing themselves to others financially. You’re subscribing to that notion of keeping up with the Joneses.”
Lonergan says how much you give depends on each family. “There’s probably a range between a dollar a week and NZ$15 a week, and that depends on how much they’re expected to do for it, the parents’ financial situation and what they can afford.”
Bank on it
Lonergan started a bank account for each of his children when they were babies and puts away a sum each pay. He’s aware that’s not possible for every family.
For the children’s own accounts, he suggests operating with good, old-fashioned cash. “For kids, it’s hard to see growth from a bunch of numbers.”
Wood agrees. “If you want to teach somebody the value of money, let them handle it and learn that once it’s gone, it’s gone.”
As soon as your kids understand the concept of money, look for a bank with a special account for children. Kiwibank offers a First Saver account, says Lonergan.
“It essentially gives a higher rate of interest for all the balances within there. We’re trying to encourage the younger kids to get into good savings habits.”
There are no account management or transaction fees, and they can personalise their account. For example, ‘Sam’s new bike savings.’
Dreams and goals
Get kids hooked on what they’re saving for, says Wood. “Work with them to create their ‘dream board’ with pictures and words. What is their dream? What do they want to do for Christmas this year?”
Show your kids the ATM receipts when you get cash, says Lonergan. They can see you need money saved in the account before you can get it out.
In the Lonergan house, there are incentives for saving. “If I gave my daughter NZ$15 a week, she could still go and buy things. But if I said to her, I’ll match whatever you save, that encourages her to save more of it.
“It’s a reward for savings, but also a reminder of what happens in the real world, where money saved earns you interest.”
Never too soon for KiwiSaver
KiwiSaver is an investment scheme for retirement and buying your first home, not for kids, right? Wrong, say the experts.
Pushpa Wood says it’s never too early to join. “I’m all for any savings scheme that encourages people to save – and I think KiwiSaver is still one of best tools around to help people to save.
“It’s not easily accessible to withdraw from, so it actually forces people into that long-term savings behaviour.”
Brown says if parents can open a KiwiSaver account for their kids early, it can have a massive effect on their savings down the track.
Wood suggests actively engaging your children in their KiwiSaver investment, even asking them to help choose their provider.
She stresses it’s important for them to understand that it’s a long-term savings plan, and if they want to go on an OE or pay for their education, they can’t withdraw it for that.
A class act
Brown’s focus is all about kids learning about money in the classroom, using the Banqer programme.
Banqer reaches 60,000 New Zealand primary school students and turns classrooms into a virtual economy.
Brown says learning about money should be a two-pronged approach, at home and at school.
“Unfortunately, it’s been proven that it doesn’t always happen at home,” Brown says.
“That might be because the parents have their own lack of financial skills, or maybe they’re just too busy and they don’t really think about it.”
With Banqer (banqer.co), teachers set up a currency and facilitate real-life situations over the course of the school year to enable students to learn about growing money, debt, interest, tax, KiwiSaver, and insurance.
Kiwibank says it’s passionate about making sure all Kiwi kids are prepared for the financial world ahead, which is why it works with Banqer to enable classrooms to access the platform for free.
Earning money from your first real job is a milestone. Help young people understand what their pay means, says Wood.
“Help them calculate what they’ll be getting; that’s one column.
“The other column is their outgoings. What expenses are they going to pay from that money, and how much are they going to put aside for savings? It could be as little as NZ$5 every payday.”
Lonergan suggests whenever they get a pay rise, they put some into savings.
“There’s this law of nature that says the more money you earn, the more you’re able to spend. Your lifestyle simply expands or contracts, based on what you’re earning. Put away a little of that extra and you’ll never notice the difference.”
He says there’s no real difference in lifestyles between someone earning NZ$50,000 and someone earning NZ$70,000. “They still buy clothes and eat out at restaurants. It’s just nicer clothes, and nicer food at nicer restaurants.”
An education is an investment towards a lifetime of earning, so most of us might agree it’s worth borrowing for.
But the first question to ask, says Wood, is whether you should take out a loan at all? Are you studying towards a better career, or just to broaden your horizons? If it’s the latter, you could work for a year to save for your studies instead.
The second question is: How will you pay it back? Make sure your kids have a plan.
Kiwibank’s Lonergan suggests you give teenagers some tips before they borrow. Work through the figures with them, so they set themselves a budget. They might be shocked to see how quickly a student loan grows.
Maybe if they get a part-time job, they won’t need to borrow the full amount for living costs. Or maybe money from a part-time job before they start tertiary education could go towards study fees.
Tips for trust-fund kids
When you get a windfall, everyone behaves differently. Like those of us who spent all our money on lollies as kids, some of us will blow it and some will save it.
Results from a long-running United States Bureau of Labor survey suggested roughly half of all money inherited is saved, and the other half is spent or lost investing.
That’s a real consideration when many of us will be considering passing on money to our children or grandchildren as an inheritance.
Kids are more likely to blow an inheritance and not save it if you haven’t had conversations with them from a young age on how to manage their money better, says Wood.
She suggests you help a child while you’re alive when you’ll enjoy seeing them receive it, rather than leaving them an inheritance.
She says inheritances are a privilege, not a birthright. “They haven’t earned that money just by virtue of being born in a family, and they need to understand that.”
So be sure to educate your kids about money so they’re equipped with skills to create a rich financial future for themselves.
This article is intended as general information only. It does not take into account your financial situation and goals, and is not personalised advice. For advice about your particular circumstances, please see your financial adviser.
This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.