Teaching Your Child About Money
Teaching Your Child About Money
On Weekend Mornings, Glenn van Zutphen and Neil Humphreys spoke to Andrea Kennedy, Certified Financial Planner on how to get your child to understand the value of money and to start investing at an early age.
Glenn van Zutphen: It is important for adults to pay attention to their financial status and well-being, and knowing how to invest. But oftentimes, the children are overlooked. Why is it important for your child to have an understanding about this?
Andrea Kennedy: As parents, you are always going to be the greatest role model for your child. So, I think the first thing parents have to realise is that whatever goes on in your house, whether you're having healthy discussions about money, anxious about money, or if you are arguing about money, your child is picking up on that. Parents also need to understand that if you're not communicating about money at all, your child’s understanding will also be that money is not something you talk about.
Having more money isn't the solution, it is having the right relationship with money that is the solution.
Neil Humphreys: Many people who grew up relatively poor or in the working class, who then moved up into the middle class, still want their children to retain those values - the appreciation of where money comes from and the value of money. How then do we teach our children to appreciate the value of money?
Andrea: I think the first thing would be to give our child the chance to make mistakes with money. Part of that is to give your child a personal experience with money - by allowing them to earn money, make a choice about what they spend their money on, and giving them the choice to accumulate and save money.
There are a lot of people who think that giving an allowance for doing things [house chores] is the wrong thing to do. It may be the best thing to do on the contrary. On your basis, whether they walk the dog or wash the dishes, they will get an allowance that will be consistent, and that is the closest thing to a salary that you can model the real economy for them.
Glenn: What is the best way to put boundaries around the allowance you give your child? Should they have control over how they spend it, or should it be dictated?
Andrea: First, they've earned that money, which is like a salary, so they [should] get to do what they want with it. That is going to be shocking to many parents. Asian parents particularly, pull that money to put it away into savings and don't let their child do anything with it. That is a mistake. You've got to allow your child some empowerment around that money, otherwise their understanding would be ‘I work and make money, my mom keeps it’. So, you've got to allow them to do things that are both “right and wrong”. Some children will save, others will spend. But if your child is spending money consistently on the wrong things, they will learn over time as long as you're not giving them more money without them working for it. If you don’t give them the chance to learn, they're not going to learn.
The point is to let your child make mistakes with money on a small scale, and they will get much better over time and ideally not make mistakes on a larger scale [in the future].
Glenn: How early is it advisable to start the allowance route to help your child understand about money?
Andrea: I think children understand money at a very young age, but it's up to individual families. On another note, parents should talk about money in a [casual] way, like [how they] talk about the weather. Otherwise, money becomes something that we don't really talk about for parents who can't model this. So, having conversations about money calmly, constantly and consistently would be one of the best things that we can give our children.
Glenn: How should these conversations [about money] sound like?
Andrea: Everyone would have a different opinion on what [kind of information] they want to reveal. We have literally talked with our children about everything; not necessarily how much we are making, but why we do what we do with our money, what we spend on, what we think we should be spending on, what we indulge in and we don't want to spend money on. We ran this whole gamut of why we don’t want to spend our money on expensive rent because we want to do or save our money for other things. Or when I invest, I look for dividend growth investment, why it’s important to invest for the long term and [talk about situations] tech bubble. So, [my children] have heard every conversation and I talk about it in the same tone as when I talk to them about ‘what they did in school today’ so they’ve become very accustomed to talking about it.
I think that if you can begin to talk about money this way, it will help your child realise that there is no shame in talking about money. We should talk about it with the same ease that we talk about [other subject matter] because [money] is something we have and need in our lives.
Neil: Most children are not interested in saving money. How do we talk to our child about saving money?
Andrea: First, explain to your child why you save money. I would set up a junior savings bank account and also buy a piggy bank for them or something where they can literally see it accumulate. Children usually need to see something growing or becoming bigger to naturally have an incentive to add to it. If they can't see it physically, their brain cannot understand what they should be saving for.
Secondly, and more importantly, is for your child to learn how to invest through understanding inflation - the increasing amount to pay for the same thing over time, such as home prices, tuition fee, or even the same thing you order at a restaurant you frequent. They need to understand that if they don't invest in something that gives them more money over time, they are not going to keep up with inflation.
This point of investment is consistency and not overthinking it.
Glenn: As parents, how should we approach getting our child into the world of investing and understanding money?
Andrea: Allow your child a way to accumulate [money] and take shame out of the conversation. Stimulate and have healthy conversations that aren't about shame. If you feel shame about money, figure yourself out first before you try to teach your child.
Cumulate, Communicate, and be very Consistent in your [money] habits, such as saving and investing a certain fixed amount of money monthly. You also have to teach your child the values around what they are spending money on, why does it matter to them and get them to understand why they are spending the money.
For more, tune in to Weekend Mornings with Glenn van Zutphen on weekends from 9AM to 12PM.
This interview was broadcasted on MONEY FM 89.3 on 5 September 2020.
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