Unless you want the apparently bottomless bank of mum and dad to be drawn from forever, you want your kids to learn how to manage and grow their own money.
But, for the most part, we still have no personal financial management education being taught in Australian schools.
The reality is that as kids we still learn almost everything we know about money from our parents, and what we learn and absorb largely dictates our own relationship and behaviour with money as we move into adulthood.
As a parent, irrespective of your financial situation, here’s five things you can teach your teens to ensure they’re well prepared as they start managing their own money.
1. The 50/25/25 rule
This is a super simple rule of thumb to teach your kids how to deal with any money they earn, and if they can start doing this with their pocket money, or income from a part time job, they’ll be more than ahead of the pack by the time they graduate and start earning a full time salary.
It’s easy.
Save 50 per cent of anything that comes, use 25 per cent for things you need (like bills), and treat yourself with the remaining 25 per cent on something you really want (but don’t necessarily need).
This easy to remember and easy to implement rule teaches the difference between needs and wants, creates a disciplined habit of saving for the future, while still allowing them to spend some money now.
And it highlights that with all income received there is room for instant gratification (with the 25 per cent portion allocated to desires) along with being sensible by covering your bills and saving for bigger things later.
One in seven Aussie kids think cash from the ATM is free money. On This Glorious Mess, we discuss why they don’t understand money. Post continues after audio.
2. Save toward a goal
When it comes to saving, it’s far more effective if we have a goal we’re saving toward.
The reason for this is that having a goal not only motivates us as we see our savings grow and our dream become a reality, it also stops us from dipping into our savings for something that comes up now.
Knowing that our savings are focused on achieving something or buying something helps us stay focused, and we know that if we spend money out of our savings we’re pushing that goal further and further away.
3. You don’t need a credit card
We’ve been brainwashed to believe that part of becoming an adult is getting a credit card, that is a thing that everyone needs when they ‘grow up’.
This is absolutely not true, and my counter argument to the whole needing a credit card for an emergency, is that I’d rather just have my own money saved up that I can use in case of an emergency.
These days all of our bank cards are either Visa or Mastercard Debit cards and can be used to pay for anything online in the way that a credit card would, so that debunks the myth also that we need credit cards to book flights or pay for other things online.
Credit cards are not needed, and even if they are used responsibly and paid off in full at the end of each month, the likelihood of overspending is high. When we’re spending money out of our own bank account, we think a lot more about the purchase and whether we really want to spend our money on it, than we do when using a credit card.
If your kids do get a credit card, at the very least it’s important for them to understand how to use it in the best way possible and that is to not use it at all, and for anything they do spend on it, it needs to be paid off in full by the end of the month.
Otherwise they’ll start incurring interest (somewhere in the vicinity of 20 per cent which means everything they do buy is actually costing them substantially more than the price tag).
4. Using separate accounts, and banks
The best way to apply the 50/25/25 rule is to set up three separate bank accounts (with three separate banks). This may seem like a little work upfront, however it’ll pay off in the long term.
The first bank account we’ll call the Cash Hub. The Cash Hub will receive all income, and is the one that will retain the 25 per cent for needs. Any bills (like a mobile phone bill perhaps) can be set up as a direct debit from this account. So the 25 per cent needs money that remains in the account and stays there for any bills or expenses that are not really optional.
The second bank account we need is the Savings Account. This should be a high-interest online savings account that doesn’t have a card attached to it (this makes is harder to spend money from the account).
Immediately transfer from the Cash Hub 50 per cent of any income received into the Savings Account and forget about it!
The final bank account is the Spending Account, and receives the final 25 per cent of any income received from the Cash Hub. This is the account that has a card attached to it and can be used for all of the day to day fun things in life, and to buy things that we desire now.
By setting these accounts up with separate banks, you’re putting a little mental barrier between where all of your money sits, and stopping yourself from spending from another area.
5. Why you need to invest eventually, not just save cash
Ultimately, we all need to invest eventually and not just keep our money in cash.
Although this can seem scary, the earlier we get started, the faster we’ll learn about investment markets and the less fear we’ll have around the risk involved.
Although there is risk in investment markets, over the long term they trend upward, and the bigger risk is leaving our money in cash that simply doesn’t keep up with inflation.
By this I mean, let’s say the interest you’re earning on your cash is two percent, and inflation for that year is three percent, you’ve actually lost one percent that year. Even though it feels very safe and there’s no daily fluctuations to have you feel unsettled, you’re definitely losing a little each year when you only invest in cash.
So encourage your older kids to take advantage of some of the free investment education available, so they can learn how to make their money work for them.
We work with Gen Ys every day who are learning to become financially savvy. Your kids can not only stand on their two feet, they can actually do well financially (and well before they hit middle age!). I promise!
Sarah Riegelhuth is the CEO of Wealth Enhancers, an award-winning private wealth management firm exclusively for Gen Y. Wealth Enhancers is offering Gen Ys a free four-week personal finance course, covering cashflow management, investing, budgeting and tracking, and understanding the pitfalls to avoid: Wealth Creation for Gen Y
Sarah is a speaker, blogger and the author of Get Rich Slow. She has also held board positions on several not-for-profit organisations including Project Futures, Entrepreneurs’ Organisation (EO), the Association of Financial Advisers (AFA) and the Institute for Global Women Leaders.