Taking kids from the piggy bank to the real world with a good understanding of money can be a difficult task. While the Financial Planning Association describes the lack of financial literacy among Australian children as one of the country’s “great tragedies”, here are seven ways that parents can help turn this around.
How to manage an allowance
Pocket money seems almost like a childhood right, and no matter what the amount, financial planners say it’s a great way to teach kids how to use cash. It’s a good idea to give children chores to earn the money – teaching them that money has to be worked for. If they spend it all, or save for a bigger item, it will teach them how to handle an income.
How to save
The piggy bank still plays an important role in teaching kids how to save. Financial Planning Association of Australia CEO Mark Rantall says to find out what children want to buy and help them set a goal. He also recommends that when they do start to earn money to begin putting away a small amount into a saving account.
How to budget
Learning to plan is also an important part of financial literacy. While creating savings goals with pocket money is part of it – get creative. Give your kids $10 in the supermarket and get them to buy ingredients for a meal. If you’re comfortable, it’s also a good idea to show them household bills – for example, explaining why leaving the light on costs money. You could also give them a fixed amount of money over the school holidays so they can work out how much to spend each day without running out.
What to do when they get their first job
FPA’s Mr Rantall also suggests that kids look at matching the employer payment into their superannuation when they start their first job, taking advantage of Federal Government co-contribution scheme. This will help focus their minds on long-term saving and planning.
“As an example, for many teens there’s nine per cent going in their salary to super guarantee payments, my advice is what goes in, double it,” he says.
“You won’t miss it, and at the end of the day you’ll be in very good shape.
“It’s such an important thing to understand the compounding effect of money in long term saving.”
All money is real money
While flying through pay pass with your credit card might make it easier at the check-out, it’s taking another step away from “real money”. The Financial Planning Association advises giving kids a debit card to help teach them that once it’s spent – there’s no more cash left, even if it is plastic.
Not all debt is created equal
The difference between want and need might seem blurry even for adults, so it’s important that young people recognise the difference. Mr Rantall recommends educating kids early. Explain to them that good debt is the kind that allows you to buy a house or investment, and bad debt is the kind associated with credit cards or other debt to fund consumable purchases.
Services cost money
There can be a disconnect between the wallet and services for kids. Mr Rantall says it’s important to educate kids about what their limits are and to keep an eye on them.
“As an example at a young age teenagers are getting mobile phones before they can even borrow money,” Rantall says.
“We see how easy it is to go past the limits that have been set, perhaps at a too low level, just by talking, SMSing, video chat and data.
“It’s easy to rack up debt that you struggle to repay and in some cases, that parents struggle to repay.”