Starting financial education early

As a parent, you want the best for your child. However, in a world that is increasingly focused on material wants and instant gratification, it is easy to lose sight of what exactly that means. Does it mean giving your child the latest trends in brand name clothing or tech, or will the time that you invest in teaching them financial literacy take them further in the long run?

It is important to start teaching financial discipline from a very young age so that they can have the knowledge to make educated decisions about their finances later in life.

Tips on how to begin your child’s financial education journey:

Start with explaining the difference between wants and needs

For younger children, you can make it a fun activity by quizzing them on items in the house and for older children you can explain the consequences of not prioritising paying for the needs before the wants.

Teach them about the basic notions of budgeting and the value of money

Even toddlers can understand these concepts if you make them relevant to their current situation. For example: introduce time allowances for certain activities, such as watching TV or playing games on a tablet. If they know they only have a daily allowance of three hours on the TV they will consider not using all three hours in the morning as they might want to watch TV later in the evening again. For older children that receive a monetary allowance, you can let them draft their own budget and assess their spending on a weekly or monthly basis.

Involve them in the household finances as they grow older

Having open conversations about money matters that affect the household will evolve their understanding as they grow. This could include showing them a budget for the weekly grocery list and letting them take ownership of sticking to the budget or even giving them a choice between the next holiday destinations while explaining the difference in prices and what the saving in choosing the cheaper option could mean for the household.

Make experiences count

Don’t just talk about money matters, show them by way of financial games, literature, and real-life scenarios.

Assist them in setting short-, medium- and long-term goals

When they have set out specific goals, they will be motivated knowing that they are saving money for something that they really want and will avoid spending money on things that they don’t need. It is important for a child to understand that not every want can, or should, be instantly satisfied. Saving for, and working toward, a goal often makes its accomplishment more satisfying. They might want to start off with saving for the big toy that they really want or even a smartphone. Medium-term goals can include saving for ‘spending money’ for vacations or a sports tour and long-term savings can include saving money for their first vehicle and tertiary education.

Teach them about compound interest and assist them in opening the relevant savings accounts

Small children can start by saving in a piggy bank. Then you can let them open their own bank account and an investment account. ‘Compound interest’ simply means earning interest on your savings, and, eventually also on the interest that those savings earn. The earlier your child begins to save, the more compound interest they'll earn. For younger children, this can be a fun exercise. Give your child a small sweet. Ask them how long they think they could save it for, before eating it. Offer to give them an additional sweet for each day so that they can keep their sweets uneaten. This helps children understand the concept of delayed gratification and reward for saving. Show them the progress in their savings as this will motivate them even further. For older children, you can also teach them about the movement in the market and about owning a share in a company.

Explain the concept of debt and interest on debt

If they borrow money, they must repay it with interest. For younger children, the repayment does not necessarily have to consist of actual money, but they should understand the concept that it will be more expensive than paying for it with the cash they have saved. Explain the difference between ‘good’ and ‘bad’ debt and that good debt might be an investment in an asset that will grow in value over time.

Encourage them to earn their own money

Taking responsibility for a job from a young age teaches your child more than just money management. It teaches them about work ethic and promotes innovation and entrepreneurship. Allowances for chores or incentives for cleaning their rooms can be a good way to start and this can progress to your child having their own small business or getting a part-time job at a later age.

Last but not least – keep the conversation going

Teaching your children financial literacy is not a one-stop shop – you should continue teaching them at all stages in their life. Don’t just open a savings account for them – constantly review it with them and keep them up to date. The benefit is that they will have the confidence to talk to you about their financial matters and ultimately make informed decisions.