According to experts, children as young as three years old are able to grasp financial concepts such as saving and spending, and their money habits are largely formed by age 7. As the primary influencer on children’s financial behaviour, it makes sense for parents to take advantage of everyday teachable moments with their children to help instil good money habits from early on. Open and honest conversations with children about money can help move the mystery and fear and make money management part of everyday life. In this article, we explore some age-related financial advice to share with your children.
Age 3 – 5: The concept of delayed gratification
Research is clear that the ability to delay gratification is a strong predictor of how successful a person will be later in life. As such, whether it’s waiting in line for a turn on the swing or to use a toy, it is never too early to begin helping children learn the art of waiting for something they really want. As children do not have a fully developed concept of time, it may be easier to start with a short-term goal with a time period of a month or less. The Christmas advent calendar provides an excellent opportunity to demonstrate delayed gratification and, being both visual and tactile in nature, allows children to employ multiple senses in the learning process. Alternatively, encourage your child to set his or her own savings goals for something that they really want, using a calendar and savings jar – representative of time and money – as props. The opportunity to track growth in the savings jar in relation to time will help reinforce the important relationship between time and money. Naturally, the best way to demonstrate the effects of delayed gratification is to demonstrate it yourself, so take time to share your savings stories with your child to keep them encouraged on their journey.
Age 6 – 10: Learning to make financial decisions
During this development stage, children can begin to appreciate that, in a world where you can have anything, they can’t have everything. Money is finite but choices are unlimited, and it is our duty as parents to help children make smart money decisions – understanding that all decisions have consequences for the future. Helping our children understand that any purchase they make today is a withdrawal against something they might have had in the future is a great way for them to understand that choices have consequences. To ensure that your child is not overwhelmed by choice, start the process by narrowing down their options. For instance, allow them to choose between three different types of sweets as opposed to being completely overwhelmed by the choices the shop has to offer. Over and above the maths, this exercise will allow your child to know what it feels like to make financial decisions and to live with the consequences. Avoid the temptation to bail your child out if they don’t have enough money to buy something they want. Financial bail-outs are not indicative of real life and may serve to rob your child of what it feels like to be deprived of something they really want, which in turn should stimulate a desire to save.
Age 11 – 13: The power of compound interest
Teaching children the magic of compound interest can be fun and memorable, although the process involves shifting the focus from short-term goals to long-term objectives. With a fuller appreciation for time, children at this age should be able to set longer-term goals for themselves. Using a R1 coin and 10c pieces is a fun way to show children how money can grow. Another effective method is to use a desk calendar and jelly beans to demonstrate that compound interest is interest that grows on itself, using one colour for the ‘principal’ money and another colour for the interest. Don’t be afraid to exaggerate the interest – keeping in mind that it’s the principle that’s important, not the exact maths.
The excitement of watching their pile of jellybeans growing exponentially on a daily basis should lead to more questions and more opportunities to discuss how interest works. An important lesson that should not be lost in the process is how compound interest can work against you.
Age 14 – 18: Money management skills for life
At this age, most teenagers are earning enough pocket money to warrant a bank account of their own. Online banking is the perfect way to allow teenagers to track and manage their spending, while at the same time reinforcing the important principle that you can’t manage what you don’t measure. The need for more independence during these teenage years presents boundless opportunities to impart money management skills on a smaller scale. Seemingly simple activities such as grocery shopping or going out for a family dinner provide perfect opportunities to discuss the household budget, making choices and sacrifices, the reasons for keeping till slips and how to track expenditure. There’s no reason why, as parents, we should not go through our bank statements with our teenage children to develop an appreciation for the costs of living, while at the same time using the opportunity to teach them how to read a bank statement. Important money management life skills during these years include goalsetting for the short-, medium- and long-term, preparing a budget, understanding the difference between needs and wants, and understanding the dangers of debt. Children also need to know the difference between saving and investing, how tax works, and what it means to be financially responsible. That said, leading by example remains the most effective form of tuition, so be intentional about involving your teenagers in real-life financial decisions and exposing them to the realities of personal financial management.
Age 18+: The value of an honest day’s work
Until your child has traded a day of his or her life for a pay cheque it’s unlikely they’ll fully appreciate the value of money. Whether in the form of a holiday waiting job, babysitting, tutoring, coaching or pet-sitting, the lessons to be learned from doing an honest day’s work are as invaluable as they are endless. Besides learning the need for punctuality, commitment and dependability, working gives one a fuller appreciation for money that is traded for one’s time – which in turn will hopefully encourage your child to start contemplating the benefits of investing and generating passive income.
Have a great day.