We probably all remember receiving a $20 note in a birthday card from a relative – or maybe $5, depending on how far back we’re talking. And whether as a child you had mentally spent it before you even said “thank you”, or decided to add it to your growing savings account, might give a good indication of what sort of money habits you have as an adult.
So, if you’re thinking about gifting some cash to the little ones in your life, it’s worthwhile thinking about how you can help them to develop a good relationship with money. Because as we all know: old habits die hard. Giving cash in an increasingly cashless society may seem like a redundant practice, but it gives kids a more tangible insight into how money works.
Note: We’re not saying there’s a right or wrong way when it comes to someone’s money mindset, but we’re big believers that knowledge is power.
5 ways to help children understand money
1. Money jars
The money jar concept will teach your children to categorise their money into different sections: save, spend, invest, and donate. You can help them to decide how much they want to devote to each. Using physical jars helps kids to understand an otherwise abstract idea. When they’re making decisions about where to send their money, they can see that they’ve only got their allocated funds to work with, and so it helps to be more disciplined and purposeful with their decision-making.
2. Opportunity cost
Talking about opportunity cost in everyday scenarios will highlight how making one financial decision will mean they will miss out on another opportunity. For example, if your child wants to go on a $20 ride at a carnival again, remind them that they then won’t have money left for a show bag. It may sound a bit like being the “Fun Police”, but before long they’ll be considering the opportunity cost before you’ve had a chance to prompt them.
3. Compound interest
Make a point to explain the difference between good debt (debt that allows you to invest in wealth-building channels like property), and bad debt (debt that costs you). For example, if your child asks for a $50 loan, try charging them (a nominal amount of) interest. Get them thinking about whether they want to pay compound interest, or earn it.
4. Radical transparency
If you’re living a comfortable life, kids can get the impression that money grows on trees. Consider letting your children know how much money you earn, and what’s involved (i.e. the long hours, years of education and training). Of course, you may want to tell them not to bring it up at Christmas lunch – we’re not necessarily suggesting you become that transparent!
5. Invest in shares
Setting up a very modest portfolio can be an incredible way to introduce children to the concept of trading shares. With the various apps around these days, the barriers to entry are not what they once were, and trading shares certainly isn’t just for trust fund babies. Make sure you speak to your accountant and/or financial adviser for guidance around the capital gains benefits.