Most parents will agree that teaching children about money is important, but what and how should you be teaching them and at what age?
It’s an inherent part of parenting. Most children’s attitudes to money are shaped by their parents, whether you pro-actively pass on information or they just copy what you do.
It’s also not something you can leave too late. A University of Cambridge Study, commissioned by the UK’s Money Advice Service, found that in that country children’s money habits are formed by the age of seven.
Shafeeqah Isaacs, head of financial education at financial services provider, DirectAxis, canvassed some of her colleagues with children of different ages about some age-appropriate lessons to help children become financially responsible adults.
Age 3 – 5: You can’t always get what you want, right now
We live in an era of instant gratification, from takeaway foods to online shopping. While your three-year old isn’t likely to be ordering Uber Eats during naptime, teaching children early that some things are worth waiting for may prevent them racking up credit-card debt on trendy clothes or the latest tech later in life.
Set attainable goals. For example, if your child wants a particular toy explain they’ll have to save for it. Have a savings jar or piggy bank into which you can put birthday money or small rewards for helping out, good behaviour or achievements.
Try to set them up for success by making sure the goal is achievable and they don’t have to wait for months and lose sight of what they’re saving for.
Each time your child adds money to the saving jar, help him or her count it and work out how much more is needed to reach the goal.
Age 6 – 10: You’re responsible for the financial choices you make
You can teach your children the basics of financial decision-making by explaining financial priorities. For example, you can tell them how when you get paid, you first need to pay bills such as the home loan or rent. Then you need to buy groceries. If you do this carefully and don’t spend money on things that are too expensive or which you don’t really need, you’ll have some left over. Some of this you can save and some might be used to do something fun together.
Practical experience is the best way of driving these lessons home. When they earn pocket money for doing household chores, help them work out a budget.
First, they’ll need to pay bills, such as contributing to a pet’s upkeep. Take them along when you buy the groceries. If they want something special get them to contribute to that as part of their grocery spend. Remind them not to spend all their money as they’ll need to save some. Hopefully, if they’ve not spent too much they’ll have a bit left over to treat themselves.
“The point is to give children a practical understanding of how to manage money using examples that are familiar. The more you can do this the better, as they’re far more likely to grasp this than abstract explanations,” says Shafeeqah.
Ages 11 – 13: The sooner you start saving the sooner you’ll reach your goals
At this stage you can introduce the idea of saving for long-term goals. Perhaps set a goal for something more expensive that he or she really wants.
Often at this stage children are reluctant to save because they want to buy things such as snacks at school or more airtime. By setting a bigger goal you can teach them that the opportunity cost – what they need to give up – will enable them to save more and reach their goal faster.
You can also teach them about compound interest: how by saving over a longer period, they benefit from the compounding effect because they earn interest on the money they’ve saved as well as the accumulated interest. For more information about compound interest click here.
Of course, when saving larger amounts of money, it’s sensible and safer to replace the piggy bank or savings jar with a bank account. Some banks, such as FNB, offer no-fee transactional accounts for children. This will also teach them how to manage a bank account.
Ages 14 – 18: Understand how to borrow sensibly
As children grow up their earning potential increases. They may graduate from doing household chores to getting a casual job. Typically, their expenses also increase. They may want to buy a scooter or motorbike to get around or even save towards a car.
At some point, they’ll probably ask to borrow money. When they do, set a goal in terms of what they’ll need to earn before you’ll match them or lend them the remainder.
Work out a reasonable period for the loan and a repayment schedule and charge them moderate interest. Explain there’ll be penalties if they miss payments and that you’ll also be less likely to lend them money in the future. While they may not immediately appreciate it, you’re teaching them the benefits of paying what they owe and also how to build a good credit record.
As they get older you can use a similar approach to teach them the difference between good and bad credit, such as loans to fund tertiary studies or start a business as opposed to borrowing money to fund an unaffordable lifestyle.
As a parent, teaching children about money isn’t something you’ll ever stop doing. Perhaps the most important lesson of all is to remember that you are a role model.
“If you’ve ever heard a child use a grown-up word or expression they didn’t learn in school, you know they suck up everything around them. The same applies to how they learn about money. Remember that and the influence you have not just in terms of what you teach them, but your own financial behaviour,” says Shafeeqah.