Teach your children about money is important

Unfortunately money is one of those taboo subjects that many people don’t like to talk about, whether they are big earners or small earners, big savers or those that don’t save at all. However, the earlier your children are exposed to the subject of money, the better.

There are a number of financial lessons that you can teach your children that will provide them with the responsibility they need and which won’t come across as “preachy”.

Start by opening bank accounts for them. This gives them the responsibility of managing their own money in a more formal, structured way. It also provides an obstacle to using the money as they will have to withdraw it out of the account.

Secondly, teach them the value of money and the importance of budgeting for how to spend it. A good place to start is that instead of just handing out pocket money assign them chores that earn them certain amounts and pay the income into their bank accounts. They have now earned the money, so it is more meaningful to them and they are less likely to spend it on things they don’t need.

Explain to them that they only have what they have earned and they cannot spend more than this. This is the beginning of teaching them how to budget, and hopefully how to save.

It is also important to teach them the difference between wants and needs. Needs are things you have to have on a daily basis, while a want in teenage terms is instant gratification. Show them the importance of delaying their wants and the benefits of saving and compound growth.

Albert Einstein called compound growth “the greatest mathematical discovery of all time”.  It is something that deserves to be understood.

Compounding is the process of generating earnings on an asset’s reinvested earnings. To work, it requires two things: the re-investment of earnings and time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment. The perfect time to start saving and benefiting from compound growth, therefore, is when they are young.

As an example, consider two individuals, John and Jane.

When John was 15 he began investing R500 per month into a unit trust at a growth rate of 9%. For simplicity, let’s assume the growth rate was compounded annually. When John reaches 30, the value of his unit trust investment will be R189 203. Of this, he would have contributed R90 000 and the investment growth would have contributed R99 203.

Jane on the other hand, had the full R90 000 lump sum to invest at the age of 15 into a unit trust. At the same annual growth rate of 9% compounded annually, the value of Jane’s unit trust investment at the age of 30 will be R327 823. That is R237823 more than she put in and R138 593 more than John.

Both examples illustrate that by saving and taking advantage of compound growth, the growth in savings actually ends up creating more for you than the amounts you put in.