As parents, all of us want to see our children receive the best possible well rounded education they can get. If there is anything we can do to ensure that they grow up with a great potential for a successful career, we would have already taken the steps to do so.
So let’s fast forward by ten to twenty years. Our little precious bundles of pride and joy have all grown up. Whichever paths they may have taken, there is one thing they have in common – they all have to deal with the money they are earning. But are they as well equipped in that area as they are in their professions?
So how can we set good foundations now that will better equip them later in life? Here are some principles:
Principle 1: The Three Days Rule
Have you ever experienced a time when your children say that they want something and you bought it for them thinking that they really want it. However, you find that after a few days, that item was left aside collecting dust for the rest of its days?
Teach your children to be patient and ask them to wait for at least three days to think about whether they really need it. Tell them that it is not easy for you to make a living and that whenever we want to buy something, we should think carefully before we make the decision. We might decide later that we could live without it or that there is something else of greater value to us if we have waited just a while more before we make a hasty purchase. More often than not, we regret buying something rather than regret not buying something!
Principle 2: Unlimited wants but limited resources
When I was learning economics in junior college, we are taught that we all have unlimited wants but unfortunately have limited resources. Simply put, you cannot have everything your heart desires.
So when your children ask you for two things, take this opportunity to teach them this principle by telling them that you can only buy one of them and that they have to make a choice. (This is regardless whether you can easily afford both items!) Even though they may make the wrong choice and regretted the decision after it has been made, you should not allow them to get the other item so soon. This will enforce them to be more careful in making similar decisions in the future before they proceed with it. Thus they will learn to treasure their choices more.
For older children who can handle money themselves, you can provide a higher allowance that includes toys/games purchases that you used to cough up in addition to their own school allowances. With this boost in their allowances, you no longer need to spend any extra on their toys even if they come up short in trying to buy something. So if they really want something, they just have to save up for it, even if it takes months. They will surely treasure the item more and be more careful about spending their limited money!
Principle 3: Working for money
While we do not want our children to go and find work and neglect their studies, they should learn that making a living is not as easy as it sounds. If possible, find ways for them to experience this for themselves. It need not be a year long job, but it could just be a vacation job, helping out a relative or close friend that you know. We could also pay them to do some chores at home but there is also a danger that they will later do chores at home only when you pay them. By doing so, they will not take their allowance for granted and appreciate the value of the hard earned money.
Principle 4: Paying themselves first
We should always put aside some money before we spend because we know that there may be rainy days when we need the money for some unforeseen emergencies or for the time we retire and need to draw down from our savings.
Our children may not necessarily need such emergency funds, but it is a good virtue for them to learn how to save from young. By showing them that they deserve to be paid, and that they should pay themselves first, they will likely end up with more savings at the end of the month, rather than wait and see whether there is any money left after all is spent and gone.
So get them to start setting aside some money from their allowance for savings before they start spending. Start small at 5% and move up till they feel comfortable with whatever they have left. A good minimum long term savings rate would be 15-20%. If they can do this as a child, it would be easier for them to carry on this discipline when they are adults.
Principle 5: Making their money work for them
But it is not only important to save, it is also important to make their money work for them. In fact, by saving and investing, they also have the option to reduce their spending now so that they can just use the interest and capital gains from their higher savings for their future spending (what we call deferred enjoyment). That is like having your cake and eating it too!
Start from the stable and trusted savings and fixed deposits, to more sophisticated instruments such as bond and equity funds when they can better understand them. Teach them how to search for such information (newspapers, websites, etc) and make the right judgment calls (if it sounds too good to be true, it probably is not true!).
Principle 6: Helping others with their money
Besides trying to raise them to become money smart adults, we can also train them to become money smart adults who are also caring and cheerful givers. In fact, when we turn some of our focus from our own needs to the needs of others, we are more likely to be contented with what we have as there are others who are in much greater need through no fault of theirs.
Therefore, get them to set aside some allowance for such purposeful (and cheerful) giving to a charity of their choice. It could be a small amount like 5% but that’s OK. According to a study, the average person gives less than 1% of his income! Imagine how the world can be made much better if people can find a way to open their wallets a little bit more.
Principle 7: Lead by example
While the above principles are good on their own basis, all that we try to teach our children will crumble if we ourselves are not money smart. If we tell them to wait three days to think over before making a purchase decision, but we ourselves buy on impulse in front of them, we have no credibility. As the saying goes, our walk must follow our talk! Show them that you follow the same principles that you teach and they will more likely learn from you, their financial guru!
Ernest Low holds an MBA from University of Liverpool and is the Head of Investment & Wealth Management with AXA Insurance Singapore. He has also written a money management book for kids called Starting Small Finishing Rich.