Teaching Children to Save - 6 Steps

Great links I use with my Chrildren ==> Tools to Help Teach You Children How to Save

How great would it be if not only were your kids financially independent, but they could afford to keep you in luxury?

That would be a turn-up for the books! So how do you give your children the very best chance of becoming a financial success? Well, first, you start teaching them about money management early.

Even in primary school when they're getting only modest pocket money you can introduce them to budgeting and saving. And as teenagers they can learn about making their money grow by starting to invest whether it's via managed funds or direct shares. It's also really important to equip them with the power to resist instant gratification by telling them all about the dangers of debt.

But there's more to it. Here is our six-step guide to making your offspring better off than you.

I am afraid we have bad news first you're going to be fighting an uphill battle. Investment strategist Peter Thornhill believes today's children are unlikely to be as well off financially as their parents because they're spoilt.

"Kids seem to think they can get away with consumption and don't need to save any money," says Thornhill, author of Motivated Money. "And parents are trying to relive their lives vicariously through their children by providing an awful lot of luxuries that we as children had to save up for.

"Someone once said, 'The way to teach children the value of money is by having none yourself'. That's a priceless lesson for baby boomers who are spoiling their children rotten."

So next time your child wants something whether it's a small toy or a designer pair of jeans work out with them a way of saving for it themselves. It could be funded from pocket money, doing extra chores at home or by taking on a part-time job if they're teenagers.

Online calculators such as that on the Commonwealth Bank's Dollarmite website can show them how long they'll need to save for something in particular, depending on how much they can save a week.

Deciding how they want to allocate their money will be your child's first attempt at budgeting.
For younger children this may be working out how much to keep from their pocket money to save for the new Tamagotchi virtual pet. Older teenagers, suggests financial adviser Paul Carroll of WB Financial Management, should be able to handle an allowance from which they have to pay for mobile phone bills, entertainment, petrol and clothing over and above basic requirements.

Helping children set goals for savings is just as important, says Louise Biti, head of technical services at financial services group Asteron. "If they're just putting money aside without a set goal, there's often less incentive," she says.

Identifying the savings goal helps in choosing the right place for the money. For instance, a teenager saving for a first car will need access to the cash within a few years and won't want any volatility, so is probably better off in a high-interest cash account.

But for a deposit on a home over the next 10 years, a longer-term investment such as shares or a managed fund could grow their money even further and they'd have the time to ride out the ups and downs of the market.

Once you've helped your children decide on a savings goal, encourage them to set aside savings before they spend their pocket money, allowance or part-time earnings.

The key, says Thornhill, is teaching them not to spend everything they earn but to set something aside.

You may even decide to make it a family rule that half gets put into longer-term saving. For example, if your child gets $5 a week pocket money, half could go into their everyday bank account (see accompanying story for child-specific, fee-free accounts) and the other half could go into an online account paying higher interest.

Once the sum in the "investment" account gets to, say, $1000 in just under two years in this instance it could be used to start a managed fund. One that allowed regular top-ups could take advantage of another investment strategy called dollar cost averaging shares are bought at regular intervals irrespective of price and overall this reduces the average cost of the investments.

As a guide to pocket money, Quantum Market Research found in 2003 that one in four children aged 10-17 earned more than $50 a week. Also in 2003, researcher Millward Brown for ING Direct's mtrek website found that for five- to 12-year-olds, Queensland parents were the most generous at an average $4.90 a week, followed by NSW ($4.57), South Australia, Western Australia and Tasmania ($3.72) and Victoria ($3.15). One in three children, though, did not receive pocket money.

Like CBA's website (www.commbank.com.au), the mtrek website (www.mtrek.com.au) is an entertaining way of teaching children about saving, earning and investing.

Your children's biggest asset is time. Whether they're saving (earning interest, although the initial saving amount won't grow) or investing (earning dividends plus the chance of increasing their capital), time will deliver results if they're patient and the underlying assets are strong.

Biti says it's important children understand the power of compound interest where interest mounts up over time because it's paid not only on the initial amount but on accrued interest as well.

Take as an example $100 invested once a month for 20 years at a net return of 7 per cent. The accompanying bar chart shows that in 15 years the interest makes up almost half the account balance (the account balance is $31,696 when only $18,000 has been invested). It's even more powerful at 20 years when the balance grows to $52,092 when only $24,000 has been invested. So saving for an extra five years has added an extra $14,400 just because of compound interest.

From last year the Financial Planning Association of Australia's financial tool kit for teenagers called Dollarsmart was included in school commerce textbooks (you can download it from http://www.fpa.asn.au/Consumers/Dollarsmart.asp or get a copy by phoning 1800 626 393). Aimed at improving financial skills, a key component is handling debt.

Take a $2000 credit card debt, says Biti, where just the minimum $30 was paid: at 16.5 per cent it would take 15 years and three months to repay, with a total cost of $5490. But if $50 was paid a month, it would take just under five years to repay, costing a total $2950.

You or your child's grandparents may be thinking of kick-starting their adult life by contributing $10,000 towards a car. Think in terms of the bigger picture: you'll be giving them more by making that same contribution to their super instead.

Yes, children can have their own superannuation funds.

Any amount can be contributed to super for a child, says Biti. There used to be a $3000 limit in any three-year period but this was changed last year.

The accompanying bar chart shows two different results from a $10,000 gift at birth. One grows to $41,406 (just over $22,000 in today's dollars, with inflation estimated to be 3 per cent per annum) by the time he or she is 21, but the other is almost 20 times that amount at $812,729 ($118,994 in today's terms, about five times more) just by leaving it to age 65. These figures do not take into account tax, and because super is taxed at only 15 per cent, you'd expect this to be even better than if taxed normally.

Biti says the difference is less in today's dollar terms (fives times versus 20) because of the time factor it shows the impact of inflation over time which also suffers from a compounding effect, on the negative side.
Grandparents on the age pension can make gifts of up to $10,000 a year without any negative impact on their income and assets tests.

Not much in interest, but plenty of good habits

Many parents put off opening a bank account for young children because the interest paid is so paltry. But there's a case to be made for having two accounts: one from the bank for everyday banking or short-term saving and another internet account offering higher interest to save for investment.

Neither should cost you anything. As the accompanying table shows, many of the banks' children's accounts don't charge for branch cash withdrawals. And, says Pavlo Taranenko of information provider Cannex, most internet accounts allow free internet transactions.

While the banks' base interest rates on a $200 balance look very low on the table, ranging from 0.25 per cent with BankSA to 2.25 per cent with Arab Bank, the accounts help children get used to banking. They also provide useful educational facilities. The Cannex table shows that CBA's Youthsaver account pays the lowest interest, not including bonus interest, but its access facilities will get your children used to ATMs, Eftpos and internet transactions. Bonus interest kicks in when there is one deposit and no withdrawals a month, making total interest paid 2.71 per cent.

Among the internet accounts, some have age limitations and tiered interest rates depending on the balance. One of the most generous, says Taranenko, is Citibank's Online Cash Manager at 5.5 per cent, which is open to all ages and requires no minimum balance.

And ING Direct's Savings Maximiser pays 5.4 per cent while Dragon Direct's directsaver offers 5.25 per cent for account balances up to $250,000. Cannex says neither requires minimum balances.

"In the beginning all you're teaching your kids is the skill of managing their short supply of money relative to their wants, and then helping them develop the habit of saving," says WB Financial Management adviser Paul Carroll.

Once larger amounts such as $1000 are built up they can be invested in managed funds.

"But they have to understand they won't be able to touch it for some years five to seven years is long-term," Carroll adds. "What they start appreciating at this point is the principle of diversification not having all their eggs in one basket. The best way to achieve this with a small amount is managed funds, but there is a cost for that in the form of management expenses."

(Source: SMH)

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