Putting your kids in the money
How do you teach your kids about money? AMANDA MORRALL gets a lesson in the "less is more" school of finance.
Money, much like sex, is a subject that most parents are really good at avoiding.
But as the adult world comes to grips with the consequences of financial ignorance and the true price of cheap credit, it is fast becoming a hot topic.
Governments are scrambling to get into the schools; banks, desperate for business, are starting to pitch their products in plain language; and teenagers themselves are waking up to the fact that iPods don't grow on trees.
So what's a well-intentioned parent to do? And is it possible to help kids grasp their material wants without sabotaging their prospects of developing a healthy relationship with money that will eventually lead to financial independence?
Australian financial adviser and writer Arun Abey, author of How Much Is Enough?, says that when it comes to money, a little tough love can go a long way.
He says children who grow up in families of wealth where allowances are doled out with no strings attached have no appreciation of the true value of money or what it takes to make a buck. He calls it the "burden of affluence". In trying to protect children from financial hardships parents might have suffered in their youth, they inadvertently deprive their children of opportunities to develop life skills.
"One of the paradoxes of affluence is that it produces kids who are remarkably sophisticated and spoiled for choice, while at the same time more dependent, anxious, directionless and unaware of the deeper sources of happiness," he says.
At the same time, the staunch make- your-own-way-in-life approach comes with its own risk if it ends up producing a child who goes nuts at the first sniff of a personal credit card. In one chapter, Abey prescribes a holistic approach to a financial education, where the pursuit of money is understood within the context of personal wellbeing.
"It's not that money is not important - it's having money with purpose, meaning and context. And money without that is highly problematic, I think."
Abey attributes many of today's financial and social ills to what he claims is a faulty assumption that money buys happiness. So in that sense, he believes it is important to tease out personal passions, then find an intersection with one's ability and potential paths to make money. At a basic level, he suggests parents can best help a child become financially literate by including them in the family finances, rather than shielding them from realities.
"Part of our children developing an appreciation of the value of money is teaching where it comes from and how it flows through the household. This means coming to terms with the 'B' word: budgeting."
In making kids responsible for some or all of their discretionary spending, he reckons they'll be able to cotton on to rudimentary concepts much quicker. And if they don't, those concepts need to be explicitly explained. Key areas include:
How to find a balance between spending and saving.
The power of compound interest.
How sharemarkets work.
Canadian stand-up comedian James Cunningham, who makes a living demystifying these concepts for kids, says most don't have a clue. For the past eight years, Cunningham has been touring high schools and colleges throughout North America teaching 16- to 22-year-olds how to avoid common money mistakes, like abusing credit cards instead of using them responsibly to build up a good credit rating. About 90 per cent of them are clueless financially, he says. Why? "Because their parents are clueless." It becomes a trial and error exercise for children, but they can end up in debt by the time they have worked it out.
Credit cards are the main culprits, he explains. He says very few students seem to realise the actual cost of buying on credit when compound rates are factored in.
He uses the example of a $1300 computer paid for monthly at a rate of 19.5 per cent, the real price of which ends up being more than $3700.
"When we do the math, they freak out."
Some studies show that children's money behaviour is established at age 10 but Cunningham believes real financial wisdom remains a foreign concept to most until the later teenage years.
He suggests that parents get their kids started on a co-signed credit card (of modest limit) at an early age so they can learn how to use it and make minor mistakes while they still have a roof over their head.
His teachings break down as: know your flow (budgeting), know what you owe (getting out of debt), and invest the dough (make money).
"My whole goal is to create that spark to help them get interested."
He attempts to get kids to recognise the difference between good and bad debt, and how money they spend appreciates or depreciates. "I get them to look at what they bought in the last year. When they've counted up the Xbox, Wii, Sony Playstation, clothing, iPod, furniture and car, they come to realise that most of the stuff they spend their money on depreciates in value.
"Then I ask them, what do rich people buy? Guys like Donald Trump. They buy real estate, art, antiques, gold, stocks and bonds.
"Rich people buy things that make them money, whereas the rest of us go through our lives buying material things that lose value.
"After a bit, the light starts to go on."