You may have missed it but last week was World Financial Planning Day (6th October). An interesting statistic from their website was that 4 in 5 Australians aged between 18 and 39, would like to “spend time a with a financial planner who could help them achieve their money and life goals” (FPA ‘Gifts That Give’ 2019 National Research Report). In reality though, only 1 in 5 actually do see a financial planner, adviser or coach to help them with their life and money goals, so a significant mismatch on this. It also means many need help when it comes to their money matters.
So as parents how can we help better educate our children to get a better understanding about money, and when should we start?
Personally, I would start while at school age, whether that’s through primary and pocket money for a job well done, and saving for a special item like a bike or toy. Getting them into a disciplined savings habit, hopefully becoming a lifetime skill. At High School, if they now get paid through a newspaper run (do they still do that?) or McDonalds, using those funds for their lifestyle but ensuring a percentage must again be put aside for a disciplined savings regime. Initially in a bank savings account but as the interest rates are quite minimal, once the savings start to add up, then you need to look a savings vehicle that includes shares and property. In the short term there may be some ups and downs (of the share and property markets), but medium to long term, they will see their money grow much faster especially as their interest compounds.
Learning about the share market and property from an early age will only serve them well for the rest of their lives. Many people for example see only bank’s cash and term deposits as a safe investment but as the interest rates are only just over inflation, you won’t see much growth. Others though see owning instead a part of the bank through shares, as always much more profitable and wiser investment over the long term (as pays dividends as well as seeing growth). Options to consider where you can invest a small amount as a savings plan that have access to a range of investment options is to look at plans like Spaceship Voyager or Raiz.
If you have more than one child, you might find teaching them about money easier for one, then the other. As we all have different personalities, some are creative, sporty, some are more analytical or disciplined. It’s the same when it comes to money. Some will find this an interesting topic and want to learn more and others will just not be interested. BUT, we all need to know about money so not being interested I can understand but ignoring in my opinion, is not a choice.
Why do I say that, well, for everyone regardless of their personality, money will be a daily part of their life. You can’t do anything without dealing in money, whether buying goods, getting into debt, going on a holiday or eventually having enough to retire – all involve money.
So while you may not be interested, learning the basics just like learning to read and doing maths, should be just as important. Now being obsessed about money at the other end of the scale is wrong too, as we all need to keep life and work balance. We need to see money for what it is, not to be stinking rich but to have enough so we are comfortable enough to enjoy life and be able to spend time on the things we want to do.
So what are the areas of money I would teach?
For me there are the six main elements I would look at based on my own experiences with over 30 years as a financial adviser and also with my own adult children.
1.Savings – the number-one issue for most young adults (though this is not limited to this age group) is living ‘pay cheque to pay cheque’. Especially for those who are paid monthly, that last week can be really tough and where a lot get into bad debt habits. I have a system in my book The Money Sandwich (and soon online course), where I show how to set up a two-bank account system whereby your salary goes into your main account (without a debit card) and effectively pay yourself a weekly wage into your everyday account (your ‘personal expense account’) with a debit card. I find it a simple way of getting an understanding of your money and expenses and help start build your savings. If this is too much to start with, then a great tip is to pay yourself first before you pay any bills once you get your salary. As for most, getting to the end of month there is nothing left in the account, so keep your savings up by paying yourself first. Aim first for building enough savings to cover yourself for 3 months’ worth of expenses as your emergency nest egg.
2. Debt – a main concern for many is access to too much easy debt. If you do feel though the need for a credit card or similar form of debt, aim to never have more than you could pay off in 10 months as a rule of thumb. So if you can afford $200 a month, than only ever use up to $2,000 as a maximum, even if limit is at say $5,000. Ignore the limit on your credit card provided by the bank: it’s in their interest for you to over-extend yourself.
Learn also between good debt and bad debt as Robert Kiyosaki who wrote Rich Dad, Poor Dad, states, the rich understand borrowing for income producing assets (good debt) that grow over time like shares and property. Whereas others borrow for luxury items such as upmarket cars and clothes (bad debt), that devalue as soon as you buy them and do not provide an income. The main aim of debt should be allow you to buy good income producing assets so that one day it replaces you ever needing to work for an income. As some say, earn money while you sleep!
3. Super – I understand that retirement is a long, long way off, and more than likely not something you are thinking about now. However, the average 25-year-old will have over $1 million in their super when they retire, so it is worth making sure it is invested in a way that is going to provide them with a better than average return. In most cases this simply means making sure their superannuation fund is the ‘high growth’ option, not the default ‘balanced’ option. Once they’ve done that, they can safely forget about it. The reason for this is (and this is not advice), the High Growth option simply means more in Shares and especially with time on their side, has on average historically provided at least 2% or more per annum than the Balanced Fund. Based on that alone, will more than likely double their super account over 30 years.
4. Insurance (you need a safety net) – If you were told that your home had over a 70% chance of burning down in your lifetime, would you insure it? Of course you would. Saying that, the risk of your home burning down is not that high, but in practice the risk of developing some form of cancer, heart condition or stroke over your lifetime is at that level. That being the case, it would be wise to consider taking out some trauma cover (also known as Critical Illness insurance) when young. A good place to start is an amount of cover that would provide one year’s salary. You can always increase this later when you have greater responsibilities, including having your own kids. Why now? First, you never know when you will need it. But secondly, if you take out this insurance now, you can ‘lock in’ the premium at a constant, or ‘level’ rate which will make it much cheaper in later years when you have the greatest chance of claiming.
5. Charity – Once your adult children have a greater understanding of their money and starting to save regularly for that goal of an overseas holiday, or property, please remember to teach them to also give back for those less fortunate. They should pick a charity that resonates and try to be just as disciplined in regularly giving as in their savings. Does not have to be much, say 5 or 10% of their regular savings, but will make a difference, make them feel enpowered and it’s important that we all look out for each other.
6. Make a plan and get advice – I would encourage your adult children to start learning as much about money as soon as they can, for example there are some great podcasts on money from millennial aged financial experts. I would also encourage them to write down their goals and make a plan to reach them (stick to a fridge so easily seen). Hopefully that may lead to seeking out their own financial adviser or coach when ready. As they may not need a lot of help in the beginning but like anything in life, having someone keeping you accountable and on track is the very best way to achieve your life and money goals.
If only 1 in 5 Australians aged between 18 and 39 seek financial advice or help, we need to think differently and I think introducing money education at school could be one way of achieving this.
Article by Marc Bineham – Money coach, speaker and award-winning author of The Money Sandwich