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It is never too early to learn about money. In my experience, learning some valuable lessons at a young age can set you on the right path to financial success in your adult life.
All things being equal, without work you don’t receive money and without money there is no pathway to financial independence.
In today’s digital age, where most children see adults using plastic and mobile phones to purchase items, who could blame them for thinking that money is an endless resource and easy to come by. These methods of transacting are highly convenient but it means we’ve lost the tangible component of money.
This is why it is imperative to teach children that, notwithstanding gifts, the only way to get money to buy things is to work. I’m not talking slave labour here but a little pocket money for household chores can help instil the real value of money. The use of physical currency (notes and coins), which kids can put in their money box, is a tangible way to see the return they get for working.
Earning money is only part of the journey to financial success. If you spend everything you earn today, then nothing is left for tomorrow. Also, the gratification you get from a small purchase today could be less than that of a larger purchase in future.
This is where the lesson of “Delayed Gratification” can be invaluable.
“Yes son/daughter you could use your hard-earned money to buy that toy today, but do you know if you save your pocket money over the next few months you might be able to buy those hot new sneakers or Fitbit? How much better would that be?”
Albert Einstein referred to compound interest as the eighth wonder of the world. “He who understands it, earns it. He who doesn’t, pays it”.
In simple terms compounding interest is where earnings are re-invested so that interest in future is earned on your original investment amount plus the previously accumulated interest. This concept has a snowball effect where earnings generate even more earnings in the future and accelerate the growth of your savings.
To experience the power of compounding you need to invest. For kids this might be a simple bank account where you can show them that by investing their savings, their money is working for them and that their bank balance can grow over time even without them adding to it. Plus, the more they add, the more they have in their account. Given low bank interest rates some parents chip in an additional percentage when saving goals are reached (or the parents become the banker themselves).
Yes, earning more helps, but it’s not always the solution. Over the past 15+ years working with clients I have seen numerous examples where those earning modest salaries are in a stronger financial position than those on high salaries. This is where I endorse the statement “it is not how much you earn that matters, it is how much you spend”.
The lesson to pass onto children here is to only buy things that they can afford and perhaps commit to only spending a maximum of say 90% of what they earn. I also encourage against impulse buying. Often enough the impulse “must have” is found gathering dust under the bed two weeks later. When your children see something they “must have”, suggest they go home and see if they still feel the same way in a few days. It’s a great life lesson!
Instilling the value of money, saving and investing early on will set your children up for a more financially successful, independent future. What’s to lose by putting some structure around pocket money?
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email email@example.com or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.