We love our children and want the very best for them. We do everything we can to set them up for a financially secure, successful and happy future. We plan to leave them a nest egg and invest in their education, sending them to the best schools. We encourage their interests in music, art and sports with all the lessons and equipment needed. However, many neglect to give their children a financial education.
Financial literacy, like common sense, isn’t very common. Only 24% of Millennials in the United States demonstrate basic financial literacy1. The Malaysian statistic is not much better, with almost 70% of Malaysians in need of financial literacy support.2 Parents have essential roles to play in helping children build their financial skills as 75% of UK teens say their financial knowledge and skills come from their parents3.
You may be putting off your children’s financial education until they are older and can understand better. However, behavioural researchers from Cambridge University encourage parents to start teaching children about money from as young as 3!4 This is because many financial habits are set by 7 years of age.5
However, not to worry if you have not started yet. You now have the perfect opportunity as the country is under lockdown and schools are closed. You will be able to spend more time with your children to teach them financial skills and other life skills not taught in school.
The most important thing to impress on children is that money needsto be earned before being saved, spent or given away for charity.
Where does the money come from? Definitely not from trees. Children need to understand that money is a finite resource that needs to be earned. But how can your children earn money?
Their initial “earnings” can be an allowance or pocket money. This allowance should not have strings attached to it as it is meant to be a learning tool, the same way musical instruments are required for learning music. This basic allowance enables children to start making money decisions. It will get them familiar with the concept of a budget based on saving, spending, and giving.
On top of the allowance, children can earn extra money through extra effort. They can choose to do extra chores. Or they can earn “performance bonuses” when they do well at their “job”, which is studying. Parents can map out a reward plan for achieving certain grades, taking on activities like public speaking, winning a sports tournament or other goals.
Now that children have money, what should they do with it? Parents should introduce the concept of saving, spending and giving. Give them 3 clear jars for each category. Children need visual cues, so transparent jars are helpful as children can literally watch their money grow.
Parents should impress upon children that they need to put some money aside for savings. Learning to save is an essential money skill that teaches discipline, delayed gratification, goal-setting and planning.
Delaying gratification is a key part of money management. In a study where researchers tracked 1,000 people from birth to age 32, it was found that lack of self-control was even more predictive of money problems than social class or IQ6 . So we definitely want our kids to start working out their self-control muscles as early as possible. However, this is a difficult lesson to learn as we now live in a world where we never have to wait for anything.
Once they start saving, children may want to know what they can do with their savings. You can teach kids that this money is to be put aside for big things - such as education or pursuing a big dream, and that they should make this money work for them.
Parents can begin to introduce the concept of interest rates by giving them “interest” - extra money in their savings jar at the end of the allowance cycle. You can also give them interest on their spending and giving jars if they have not touched the money at the end of the allowance cycle. This will help them learn self-control in spending.
Meanwhile, the concept of investing can be introduced through games like Monopoly. With Monopoly, children can make the connection between savings and investments. If they save the income they get from passing “Go” to purchase property, it will give them more streams of income. This in turn helps them save more and acquire more assets. However, they need to be discerning, as some properties on the board are more profitable than others. This teaches them that it’s not any investment, but the correct investment that helps their savings grow.
Money in the spending jar can be used by children to buy anything they want. Of course, parents should guide them on what makes a good purchase. You can introduce the concept of needs versus wants, so that children know how purchases should be prioritised. Explain that they should prioritise needs such as food, shelter, basic clothing, healthcare, and education. Wants are extras- such as candy, designer goods, video game consoles or the latest smartphone.
You can use own budget to show how you are putting your wants aside in favour of the needs of the family. After all, one of the most important ways to teach financial management is to be a good model of financial management yourself. For example, you can show that you are putting off buying a new big-screen television or a new car in favour of saving for their education, as your current television and car work just fine. Take them grocery shopping with your food budget, online or in real life, and teach them how to comparison shop and get the most bang for their buck.
With the spending jar, it is paramount that parents let go of the urge to help their children manage their money. It may be difficult to watch your children waste money on silly items, especially after you have given them advice. However, these bad money decisions will teach them more about managing money than any advice you can give. Better to let them make these mistakes now when the stakes are low than when they are adults.
The third jar is for giving as we want to inculcate generosity in our children. After all, if we are fortunate to be in a good financial position, we should do our part to create a better and happier world by helping those who are less fortunate or contributing to causes we care about such as animal welfare or the environment. Children can learn that they can make a difference in the world around them through charitable giving, giving them a sense of empowerment. To top it all off, the giving habit is good for our well-being, as research shows that people who give -both in money and time and in both big and small amounts- are happier and healthier for it7.
There truly is nothing better you can give your children than the gift of financial literacy. It is the gift that keeps on giving, helping your children to continue to make good financial decisions in life, avoid financial pitfalls such as getting into credit card debt, living paycheck-to-paycheck and falling prey to scammers so that they will be able to conserve and build on the legacy that you leave them.
At RHB, we are happy to support you in different ways as you teach your children about financial management. Our RHB Junior Savings Account* is a good way for children to grow in their financial literacy as they can become joint account holders from the age of 12 and learn how to handle a debit card and keep good financial records. Or you could model good financial management by ensuring your children’s bright future with the RHB Alpha Future plan amongst others. Your Relationship Manager will be happy to help you discover new ways to support your children’s financial education for their future success.
*RHB Junior Savings Account is protected by PIDM up to RM250,000 per depositor.