Whether you have children on your own, grandchildren or (adopted) nieces and nephews or plan to have children at some point in the future, you can play an important role in educating these children financially, especially taking into consideration how little most schools incorporate personal finance into their curriculum.
Save money for your children
The first thing to do, is to set aside some money in a savings or investment account (again it doesn’t matter how much or little) so you can start growing some money for your children. Not only will this once they are a little older give you a great topic to discuss with them to show them the power of compound interest, it also makes for a great 18th, 21st or wedding gift. Continue reading →
In the previous step we looked at how setting aside even small amounts of money can give your (grand)child(ren) a very nice mini-fortune by the time they turn 18 if invested well. Of course you (or they) might be unlucky and the market might just hit a bad year when they turn 18 (or 21 or 25) but who’s to stop you from waiting another year or 2 until the market has recovered again before you hand over the investment account?
But then what’s to stop them from spending all of the money – the money that you set aside deligently for years, making the most of that compounding interest – in one weekend, on one holiday or on a (in your view) stupid purchase?
Of course the problem with this is that you might be skimping and saving to get this money together, but once you give it to your child, remember it is their money. Whether they splurge on a luxury vacation, use it to fund their college or as a first downpayment for their house is ultimately their own choice..
That said, as a parent or grandparent you have a responsibility in educating your children about finances. Funnily enough we are totally cool and understanding of having to teach our children social skills in order to make friends and to respect others, help them with any maths or French homework and teach them basic personal care skills like cooking and the importance of having showers, but the financial education is often neglected. Whether people don’t want to bother innocent children with grown up matters, think that school will teach them this stuff or just generally feel uncomfortable about discussing money with their children I don’t know, but teaching children about money is an important role any parent has. And if you do your job well and teach them the real value of money, your children might be less likely to spend all of that money you gift them when they turn 18 in one go.
So let’s look at some ideas on how to teach children the real value of money from an early age on:
On a day out, or weekend away or even a holiday, give children a mini budget for themselves or tell them that as a family you have a total budget of say $40 that together you need to decide on how to spend. They get to vote (or decide) whether to have a simple sandwich and some money for an ice cream and a small souvenir or whether to go for that slightly fancier meal but not have any extra money for an ice cream nor souvenir. This helps them develop skills in budgetting.
Make them aware of bills that need to be paid, such as utilities and get them to play their part in turning off lights, closing doors and not letting the tap run when brushing their teeth.
Turn grocery shopping into a competition by finding offers, 3-for-2 deals etc.
Give them a small amount of pocket money from an early age on to get them to save up for a bigger purchase they want. It teaches them the value of saving, planning and prioritizing.
Open a savings account and get your child to deposit money in it, even if it is small amounts. Explain interest and compound interest to them and get them to see their money grow.
When your child is a little older, explain the concept of the stock market and investing and mention the investing account that you have opened in their name so they can also see how their investments are growing. Show them to sit tight when the market falls and the importance of patience on the long run.
Teach children about debt and how this is expensive in the long run. The best way for them to learn this is by giving them a small loan and charging interest on it. A tough lesson to learn but it will be a very valuable lesson. Even if they end up paying $5 on a loan of $10, those $5 will teach them a life long lesson on how interest and compounding interest on a loan will ultimately be a killer to their personal finances.
Go through credit card statements together with children or spend your weekly administration and filing system together with your “personal assistant” to teach them the importance of checking financial statements regularly for errors and to stay up to date on how (un)healthy your finances are.
Consider some type of “savings match” or interest you give children for every dollar they save if they haven’t yet got a savings account. This could be done monthly by showing you how much they have saved and after you count it together you give them a certain amount of interest or match their monthly contribution.
Explain to children how we are constantly tempted to spend money by adds and peer pressure. Teach them how these adds work and get them to evaluate whether they really need that new gadget or toy and whether it will add new value to their life.
Get children involved in sharing their wealth through donating to charities or fund raising for charities so they get to appreciate that there are many others who are far less lucky than they are and that that they can make a difference to the world by giving some of their money away or by getting involved in deciding which charity you should donate to.
Step 69 – Involve your Children – in detail:
Discuss with your partner the importance of teaching your children about the value of money and agree on a basic approach to this. It is important to discuss this and be aware of each other’s involvement and ideas so that you don’t clash over this.
Consider a set time a week, maybe at the weekend, which is dedicated to finances. This could be 30 minutes in which you discuss something new, go through a new target for the week or count savings and update financial statements. Depending on your child’s age these activities might evolve into more complex activities and the 30 minutes might become longer.
Find a balance between teaching your children the value of money, saving and investing without taking away from the fun. Make sure not to turn ALL of your fun family days into skimping or budgeting days – kids should also be able to enjoy these days! Don’t overload your children with information but see it as a step-by-step progression that takes time, skills and awareness to develop (a bit like compounding interest come to think of it!).
If done well, these finance lessons can become a great headstart for your children in life as it gives them so many skills that others might take years to discover by themselves when they are in their 20s and 30s. Just make sure to make it appropriate to your child’s age and awareness. Happy teaching!
Children cost money of course, even just their day-to-day expenses seem endless: clothes, food, extra activities and birthday parties to name just a few. But I take it for granted that if you have children, grandchildren or nieces / nephews (even if they are “adopted” and your friends’ children), that these expenses are covered in your budget, either in your regular categories, or under ‘presents’ if they aren’t your own children. If you haven’t yet got children, but are planning to have children, I again assume that by now you are financially savvy enough to have set up a savings account in order to pay for the initial “start up costs” for children: baby room decoration, push chair, car seats, clothes and all other assecories you’ll need.
But what about “later”? This might sound like a long time away still, but those children will at some point reach their 18th birthday and will go and try their luck in the real world, whether that is at college, travelling or trying a “real” job, there will come a time when they no longer depend on you (at least not officially – they might still come back home from time to time to ask for some extra money).
Wouldn’t it be nice to be able to give them something more than just a $50 bill when they leave the house, to get them set up? Or what about giving them something when they get married, buy their first house or have their first child.. Whatever it is that you decide, think about what you can do now to help them later. And remember that if you start on time you have the advantage to look ahead and use that best friend of ours: compounding interest to create a small fortune for your (grand)child(ren).
What and how to save
Let’s just calculate through some different scenarios to give you an idea on how to get started. For all of these we assume that you start contributing to these saving plans from the moment the baby is born (or let’s be realistic and say you do it as soon as your (grand)child is a month old).
Scenario 1: Open a savings account and set aside $10 a month. Assume an average return of 5% (which unfortunatley is not likely at the moment though!), an inflation rate of 2% and that you keep contributing $10 a month until you give the child the full amount. Your (grand)child would then receive the following amount: (numbers in 3rd and 4th column rounded to $50).
Total paid in
Nominal value at end
Adjusted for inflation
Not at all bad if you could give your (grand) child some $3550 when they turn 18 or even $6000 when they are 25.
Scenario 2: What about instead of opening a savings account (which is unlikely to give you anything close to 5% for a while), you put that money in an investment accout, assuming a 7% return and 2% inflation rate? That works out as follows:
Adjusted for inflation
As you can see, by just putting away $10 a month, even if you held it only til they were 18, you’d be able to give them more than $4300 or the equivalent of $3000 in today’s money.
Scenario 3: Of course, you might be able to set aside more than $10 a month. Let’s assume you’re lucky enough to live in a country that has a child benefit scheme in which you get some financial support from the government to help with the expenses for raising children. Imagine you were able to set all that money aside and invest it for your child? Child benefit varies greatly per country but let’s take the average of about $75 per month. Let’s assume we’ve still got an average of 7% return and 2% inflation rate. This is how much you’d have if you keep investing that child support:
Adjusted for inflation
By their 18th birthday you’d be able to give your child $32,500 (with a current value of $22,000)! That’s a small fortune to me and it for sure would be to most 18 year olds!
That said, child support is generally likely to adjust for inflation, meaning that you get $75 this year, but $76 next year and $77.50 the year after. As long as you keep adjusting your investments along with this, remember that you would then end up close to the nominal value anyway. In that case your child would receive around $32.500 on their 18th birthday.
Of course the above are just some examples of have careful financial planning might give your child a nice head start when they turn 18 or 21 or whatever age you decide. Maybe you can’t survive without the extra child benefit that you are receiviving and therefore can’t invest all of that money. But what about half of it? Or even just $25 a month? $10? Go back to the budgetting steps to read more about how to budget and to build in priorities to decide whether you really can’t or whether you decide to prioritize other goals for your money. Even just the $10 will still give your child a nice pot of money to start their adult life that not everybody gets.
Step 68 – Set aside Money for Children – in detail:
Let’s start with how many children, grandchildren, nieces / nephews or other children in your life you (might) have and who you’d like to help financially when they come of age.
Investigate and decide how much you can invest either monthly or yearly. Remember that if you have several children (or might have several children) or grandchildren, you probably want to set it up equally, so that you don’t invest $100 per month for child one and only $20 for child two. Plan ahead and try and keep it equal!
Open an investing account for each child but carefully check how to do the legal side: make sure you can open it in their name (in some cases only parents can do this). If you are a grandparent and you can’t open it in your grandchild’s name, consider opening it in your name, but stipulate the child as the beneficiary and make sure to include conditions in your will that the money is to go to the child when they turn 18 and not to your heirs.
Set up automatic payments into this investing account.
Remember that the earlier your start, the more time the interest can compound, but even if your (grand)child is a little or a lot older, that doesn’t mean you shouldn’t still open it.
Decide when you want to give the money or the original investing account to your child. Instead of giving them the money, consider that your child could just continue to grow the money. Tell you child beforehand so they can start planning on what to do with the money, as otherwise they might be tempted to take it all out and spend it in just one crazy weekend.
Remember to open a new account for any additional children
Saving / investing and seeing your money grow can be really rewarding, but there’s an extra sense of satisfaction you can get from setting money aside for somebody else, and seeing their fortune grow even before they are aware of it.