OPINION: The start of a new academic year means thousands of eager school leavers will begin their journey towards independent living.
Having carefully nurtured and taken financial responsibility for your kids up to the age of 18 or so it can seem cruel to turf them out of the nest.
Somewhere on the continuum between providing for them for the rest of their lives and cutting off their financial lifeline at 18 lies the right level of support which will allow them to become financially independent and responsible adults. Get it wrong and your kids may struggle to be financially successful later in life.
Here are the five worst financial mistakes you can make with kids leaving school:
1. Not teaching your kids how to make good financial decisions: Financial decisions are neither right nor wrong, they are simply good or bad. One of the most valuable gifts a parent can ever give a child is the gift of knowing how to make a good financial decision; that is, one which is made with consideration of all the options, based on sound information, with a high level of awareness of the consequences of the decision which reflects the values of the decision maker. With each financial decision your kids make, teach them how to include all these elements so as to make a good choice.
2. Bailing your kids out of a financial mess: For young adults, understanding consequences can be one of the most challenging aspects of financial decision making, as they lack life experience. The best way to learn about consequences is to experience them. Bailing children out of a financial crisis prevents them from learning and taking responsibility, possibly setting them on a path of making bad financial decisions for the remainder of their lives. Help them by all means - but don't make it too easy!
3. Being too generous: You can't protect your kids from the real world forever. At some point, they will have to pay board, rent, and other living expenses and earn the money to make the payments. Letting kids live at home at little or no cost gives them a false sense of reality. Charge them full board and put some or all of what you charge them into a savings account. That way, they will have a savings nest egg when they eventually want to live independently.
Giving too much to kids creates dependency and most importantly, it allows them to develop a lack of respect for money that can lead to financial problems later in life. Lack of respect for money often goes hand in hand with wastefulness, an inability to save for longer term goals and sometimes a life burdened with debt.
4. Paying off their student loan or providing financial support so they don't need one: For as long as student loans are interest free, it makes sense to borrow rather than use your own money. Think of it this way; if you had a lump sum of $30,000 sitting in the bank earning interest, would you withdraw it to pay off a $30,000 debt on which there is no interest? With houses becoming less affordable, it makes sense to help your kids buy their first home rather than pay off their student loan.
5. Not teaching them the fundamental principles of good money management: There are three basic principles to teach your children when they leave school:
(i) Put aside money for unexpected expenses.
(ii) Avoid dumb debt. The worst kind of debt is money borrowed to buy non-essentials such as new furniture, televisions and computers.
(iii) Set a limit for spending on non-essentials such as entertainment and eating out. Have a separate bank account for non-essential spending into which money is transferred.
Avoid making these mistakes with your kids and you should set them on the path to financial success.
Liz Koh is an Authorised Financial Adviser and author of Your Money Personality; Unlock the Secret to a Rich and Happy Life. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.
- Fairfax Media