Teach Kids About Money
Lessons in money started early for my Little Saver. A significant event happened when she was six. She bought her first pair of earrings. They were Swarovski ones from the local pharmacy. Very very bling. They cost $25. She REALLY wanted them and knew she had $28 in her piggy bank at home. After considerable discussion about it being a LOT of money she decided to buy them and as she didn’t have any money on her, would pay me back when we got home. She was SO excited. She was straight in the door at home and to her money box. It was emptied on the floor and sorted into $1 piles. I then pulled 25 of those piles across the carpet towards me, leaving her only $3. I was unprepared for the response. She fell flat on her back in a fit of tears and through the sobs and wails cried “you have ROBBED me Mummy, YOU HAVE ROBBED ME!” I n c o n s o l a b l e. I felt terrible and wanted to push it back again towards her but I knew this was important, so I didn’t. And I did have to hide a bit of a giggle if I’m honest; she may have a future in drama. I kept the $25 and from that day she has been a heck of a lot more careful with the cash she has and because she realises the value of the earrings they are worn with pride. She also has a better understanding of why we don’t buy her everything she sees and likes. Stuff costs money and your supply of money can be gone in a flash.
Last week I asked my now eight year old Little Saver to empty out her heavy money box so that I can transfer some of this into her online savings account. Sitting on the floor we sorted all of her coins into $1 piles which she finds extremely fun. Kids are so tactile and visual and she loves counting in different denominations. End result was a $20 note and 50 piles. $70! Boom. She also had some foreign notes from her overseas Aunties which may as well just get framed and put on the wall as she will NEVER let me change them into NZ dollars (Brexit just caused her pounds to be worth less anyway). She was so excited and was shouting “I’m rich, I’m rich”. All those little jobs that she was earning $1 for had built up and it was plain to see in all of those little piles right in front of her. She felt very proud.
I put the laptop on the floor and opened up her bank account online. I explained that money in her piggy bank will only ever grow by her adding her coins to it, but money in the bank grows without you having to work or do anything. Its called “INTEREST”. I showed her how much interest she made last month. She earned... wait for it… $2.22 interest minus tax of 38c = $1.84. In terms she could understand I explained “that is two jobs you did not have to do that month”. We discussed it further and I said I wanted to take $35 of her coins and put it into her online savings account so she could earn more interest.
She did not want to put ANY of the money in the bank because she wanted to keep it on hand as she loves having a heavy money box. WELL, it took a lot of explaining to show her that it was still HER money but it was now stored in her bank on the computer. Kids are SOOO visual and a bunch of numbers on the page means absolutely nothing when you are eight. 50 piles of $1 means everything. That, she can understand. We got there in the end and I let her push the appropriate buttons on the computer to transfer $35 from my account to hers. I then staggered around town for the week with $35 worth of 10, 20 and 50 cent coins in my purse.
A while back a little girl I know turned eight. She is a great kid and many friends came to her party where they all had a marvellous time. She received many gifts for which she was grateful and she also received a lot of cash from relatives who are a little bit like me and often have NO IDEA at all what to buy kids. When you are young you hope for as many of these relatives/friends as possible! With a smile from ear to ear and a squeal of delight she told me she now has $140! Thats a lot of coin when you are eight. Or she did have a lot of cash. As the excitement of the birthday weekend continued into the next day she was off to her favourite big box trader in town and had a spend up. “Thats exciting” I agreed with her! “Oh and and by the way” I asked “how much did your parents make you save”?
She looked at me with her head on one side and a genuinely perplexed look on her face and said “whats saving”? Sharp intake of breath from me. She had spent the lot.
I’m sure we can all recall the excitement of receiving money for a birthday and then as we got older the need to have a bit of cash coming in while we were still living at home and in the final years of school. Personally I bought some really rubbish music with my dollars. Rick Astley anyone? But putting it into today’s terms the stakes have gotten a lot higher.
This whole scenario raised a big question for me. One day my little girl will need cash and may also be looking to have a part time job and I did wonder how much money is going to be enough and would she know how to save it first and spend it wisely?
Teenages today don’t feel complete without the latest phone. The latest 64GB iphone is $1,400. But hey retailers understand that consumers might not have that much money so you can… pay it off. It is easy to sign up for a plan and pay it off for $80 a month and that is exactly what many kids are being enticed into. Either you can pay cash, The Bank Of Mum And Dad stumps up, or hire purchase takes care of it. Either way you run the risk of spending all of the money you have or what I consider far worse, spending money you don’t even have.
And then there are other expenses. A car is handy when Mum’s taxi refuses to cart you round. But with a car comes petrol, insurance, maintenance etc. And of course there are the clothes, lots of clothes and the parties and the social life and on and on it goes. $$$$...
This rings alarm bells with me and all I can see is a steady slide down the path of consumer debt. If children and teenages are scraping by on the money they can cobble together now, what of the future? A lot of them may end up broke before they even get started.
So, what can I as a parent do to set my own child on a different path?
From what I have seen so far, basic home economics are not taught in school, but simple math is and that should be enough to get her started. So with our daughter we are aiming to educate by way of regular conversations about money and a bit of simple math. When we get the groceries we compare prices in the isles. When we pay at the checkout we talk about how much it cost. If we go out for lunch after weekend sport as every kid wants to do we tell her that it just cost us $45. When we want a new item we rarely buy the first we see but research other options and shop around. We buy second hand whenever possible. I tell her what her Dad and I earn an hour and how much money we took home in a week. If she is given money we encourage her to save half (she tends to save 100%). When I’m working on our investment spreadsheet I encourage her to read the numbers for herself regarding her own savings accounts. One of our major points is to consume less. We are setting a good example by her always seeing us working hard for the money we make and being mindful about how we spend it.
We don’t pay her pocket money regularly (you will see why when you read below) but instead give her money when we see her doing a job without asking or doing a job willingly once asked. For this we would give her $1 a job and over the course of a week it would add up to $1 - $5 or more if she has been particularly helpful. Like most parents we struggle to then cough up the cash which is why I love this concept from ASB. I wish they would hurry up and produce it: https://cleverkash.asb.co.nz
My thought is that around the home we all have to work together as a family and she should not expect to be paid for every job.
She has also recently started selling ‘fire starters’ to a trusted neighbour. She bundles up cabbage tree leaves and sells 12 bundles for $2. She practises what she is going to say to them on me before bravely going to knock on their door. Just a small exercise in learning the connection between work and pay.
We all hear on a daily basis about first home buyers struggling to get into the Auckland property market. This has certainly got me thinking about the future for her. Although she says now that she wants to live with us forever (cute), one day she won’t. At her age she can’t save hard enough for the bills that will come up in her future, such as tertiary study or buying a home so we are giving her an 18 year head start on this. In some ways this may be wrong, after all I have made my own way with no financial help from my parents (but lots of support and love), but I think the goal posts have shifted for her generation and if we can make things a bit easier for her then we will. You may read below and think it is too little or too much and I would love you to work the numbers for yourself and create something that works for your whanau.
Therefore we started some investments on her behalf...
When she was a year and a half old we signed her up for Kiwisaver. Not sure why there was the delay but in doing so she has missed out on $720 of parental contributions! Sorry child! She started off in a Mercer Kiwisaver scheme but on the advice of a financial advisor last year I switched her to an (ANZ) OneAnswer Kiwisaver Scheme Growth Fund. I don’t anticipate changing again in the short term.
She received the $1,000 Kick Start from the government (this initial payment is now no longer available to new sign ups) and a few lump sums of $1,000 or so from her grandparents. We also add $40 a month ($480 per year) to the scheme on her behalf. Being under 18 she is not entitled to the member tax credit of $521 (the same applies if you are over 65). To sign your child up they will need an IRD number which you can apply for here: www.ird.govt.nz
In case you are wondering how the fund above works. Each month I direct credit $40 to her fund. This buys ‘units’ in the fund. The unit price fluctuates up and down depending on how the fund is performing.
You will also need to know your child’s PIR (Prescribed Investor Rate). This rate dictates how much tax they will pay. Most kids will be on 10.5%. It is easy to work out, just click here: www.ird.govt.nz
Once this Kiwisaver started to accumulate I then became aware that retirement is a very very long way away for my Little Saver and that she would need money before then for university, some other tertiary study, starting a business or maybe even a house deposit. Who knows! So, I set her up a managed fund, also with ANZ called OneAnswer Growth Multi Asset Class. We started with a $1,000 lump sum (our money) and add $50 a month into this on her behalf ($600 per year). This is a newer investment and she is currently sitting on $1,900. To set this up I went through a Financial Advisor (more on that another day, if you need to know now just message me). These two funds are essentially the same but one locks the money in and the other lets it be taken out if and when necessary. They are both ‘growth’ funds i.e. riskier funds; but at age eight she can handle risk as if it all goes belly up she has a long time to recover from it financially. I’m planning on going into more detail in a later post.
Finally, there are the day to day expenses and I have created a sub account off my own bank account where I transfer $20 per month. When she is older I will create her own bank account but this works for now. I always keep the balance over $1,000 so that she can receive interest. Interest rates are TERRIBLE at the moment and it only earns 2.1%. If she wants to buy something for herself she can use this. It builds pretty slowly in the account but from time to time I skim money off and put it into her managed fund as its earning more interest.
She knows these investments are set up for her but has only a little understanding of them at the moment. I give her an update each month of how well she is saving. I want her to be aware of them early on so that over time she can watch them grow and hopefully reflect on the effort it has taken to do that. In time, as she begins to earn and save herself I will reduce and then stop my contributions. My thinking is that if I kept it secret until she was 18 (or whenever) it would feel like a Lotto win instead of years of careful saving. I would be horrified if she spent the lot on consumables and holidaying with her mates but at this early stage the signs of her not doing that are good. When she becomes a teenager this may well change. Get back to me in 12-15 years for an update…
P.S. When writing this I felt a glaring hole in my post when I omitted talking about gifting. I don’t want to create the impression we are hoarders of cash with a ‘more more more’ philosophy. We are not. As a family we donate in the forms of goods, time and money. We talk about spending some, sharing some, saving some. For our Little Saver we encourage the same and every time we see her showing evidence of this we praise her efforts.
Each time I get a new subscriber I receive a nice email from Mailchimp saying “someone’s is pickin' up what you’re are puttin down”. It’s a good feeling knowing that I’m writing something useful to others. And even better is the emails I’m receiving now.
Check out this one:
“On a flight up to Auckland earlier this year I sat beside a dairy farmer from Winton who was telling me all about his children who were either studying or about to leave home for university. Given the lower dairy payout things were going to be tight, and university study is not cheap. He was thankful that he had entered a scheme (can't recall what) where he had put money away for over 10 years for his kids and was now appreciating the benefits.” Thanks MR A for getting in touch!