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Educating your children about money sounds like a simple thing, but as most parents can attest, it is extremely hard when you have little ones who think money grows on trees.
More and more exposed to a consumer culture that emphasises buying things to make your life better and happier, children often do not know the value of money and why they should save.
While some research shows that a majority of South African parents teach their children to save money, other surveys show one in three parents are more prepared to talk to their children about drugs, alcohol, or sex and dating than money.
In a country known for its citizens’ inability to save even before the current financial crunch, this is important thing to do, but how do you teach your children about money in a meaningful way?
The majority of parents teach their children to save money and even checking prices to get a good deal, but only half teach them how to pay bills, while a quarter teach them how to use a credit card account and the stock market, other financial instruments and using coupons.
Some parents will allow their children to spend their pocket money however they wish, while others give input into what they spend money on, but the children still have the final say. Some children also do not have to do chores or other work for pocket money and if they can afford it, parents are more likely to buy an expensive item that the child desperately wants.
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The well-known social experiment, the Stanford Marshmallow Study, is a good example of how to teach children about money. The experiment was conducted on 4-year-old children where each child was offered a marshmallow. They could choose to take the marshmallow or wait for the tester to return 20 minutes later when they would get two marshmallows.
When the researcher, Michael Mischel, tracked the children down years later when they graduated from high school, he found a dramatic difference between the groups. The group that could delay and wait for two marshmallows were successful at school, while the group who did not wait, was struggling.
Their financial habits were different in the same way and this is why you should start teaching your children about money by setting and achieving financial goals and delaying gratification. Today, spending money has become as important to children as it is to adults.
As money gives people the opportunity to make decisions which can have a far greater negative impact on the financial future of their children than any investment decisions they will make, it is important to educate, motivate and empower your children to save and invest regularly to keep more of the money they earn and do more with the money they keep, Paul Richard, executive director of the US Institute of Consumer Financial Education, says.
According to the Association for Savings and Investment South Africa (ASISA), children should learn about money in the earning, spending and saving process by teaching them that the money you use to buy things must be earned first by talking about how you earn money.
Children should also be involved in the budgeting process where they can learn the golden rule of saving first and spending what is left after expenses have been paid. They have to learn how much it actually costs to run a household and pay for education while you aim to save at least 10% of your monthly earnings.
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Introduce children to money and how to save and spend it as soon as they can count, as it is a well-known and researched fact that children learn by copying others and repetition. This should also include communication between parents and children to teach them about good values about money, including how to save it, make it grow and spend it wisely.
It is quite easy to teach children to spend money wisely in a society that focuses on immediate satisfaction by buying what you want. Teach them from an early age what the differences are between needs, wants and wishes to prepare them for making good spending decisions in the future.
Another important aspect of teaching children about money is by setting goals, a fundamental concept that helps children learn the value of money and how to save. If you have no goals, you have nothing to strive and save for. Every toy or gadget children ask for can become a way to set a financial and savings goal and create motivation to think about spending money. Setting goals teach children to become responsible for their own futures.
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Children must also learn to save and accumulate money instead of getting money to spend. Teach your children from a relatively young age about interest and how it makes your money grow by paying children interest on money saved at home, while explaining and demonstrating the concept of earning interest income on savings.
This is also a good opportunity to teach children to calculate the interest so that they can learn and see how fast money grows through the “magic power” of compound interest. Parents can even offer to match children’s savings on a rand for rand basis to encourage them. As they begin to understand more about interest, you can start teaching them how a good credit rating depends on a history of regular and successful savings.
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If children get pocket money, younger children should get their pocket money in small denominations so that they can learn to break up the total, such as four R5 coins instead of a R20 note. Parents can then say that at least one coin should be saved. If you pay interest or match the savings rand for rand, the child will quickly see how the money grows.
Savings accounts will make children feel that they are now handling money like adults and looking after it by themselves. Parents should take their children to the bank to open a savings account to encourage the savings habit even further. If they save up for something, they should then be allowed to withdraw the money and buy what they saved up for.
Keeping track of their money
Also teach them how to keep track of their money, a skill that they will use for the rest of their lives. They should keep records of how much money they received, spent and saved or invested. Keep an envelope for every month which can be kept in a big envelope for every year. They can be encouraged to keep banking slips and receipts for things they bought with notes that explain what they spent money on.
Do not forget to teach your children about borrowing money and paying interest by letting them borrow small amounts but charging interest on the “loans”. They will soon catch on how expensive it is to “rent” someone else’s money.
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Children of various age groups need to learn different lessons about money. Pre-school children can get a set amount of pocket money to spend on treats to teach them the basics of budgeting. Explain, for example that if they get this now, they will not be able to get that toy they wanted to buy and teach them about consumerism and how to delay gratification. Children in this age group must learn to save in a piggy bank or money box for something they want.
Then introduce more items they need to budget for for primary school children to teach them to think ahead about buying things such as birthday presents for friends, toys or outings like visits to the zoo or movies. In this age group children can learn that they can make more money to help save for their dream bike by earning money.
This is also a good time to introduce the concept of investment by letting them take some of their saved money to buy what they need to earn money to teach them that you need to budget to buy things that will help you earn more money to make a profit.
You can now also increase savings goals to save for things like spending money for a holiday or a computer, that will teach them to dream big and plan to make the dream come true. These principles can be reinforced every time they buy something. Also educate them about advertising and explain to them what impulse buying is. Help them to wait 30 days before they buy something and see if they still want it.
When they go to high school, take them to the bank to start an investment where they can invest some of their savings for a down payment on a car or an overseas trip when they finish school. Also help them to start budgeting for things such as cell phone and data bundle costs and encourage them to start earning pocket money in clever ways, such as blogging about their interests.