As parents, all of us want to see our children receive
the best possible well rounded education they can get. If there is
anything we can do to ensure that they grow up with a great potential
for a successful career, we would have already taken the steps to do so.
So let’s fast forward by ten to twenty years. Our little
precious bundles of pride and joy have all grown up. Whichever paths
they may have taken, there is one thing they have in common – they all
have to deal with the money they are earning. But are they as well
equipped in that area as they are in their professions?
So how can we set good foundations now that will better equip them later in life? Here are some principles:
Principle 1: The Three Days Rule
Have you ever experienced a time when your children say
that they want something and you bought it for them thinking that they
really want it. However, you find that after a few days, that item was
left aside collecting dust for the rest of its days?
Teach your children to be patient and ask them to wait
for at least three days to think about whether they really need it. Tell
them that it is not easy for you to make a living and that whenever we
want to buy something, we should think carefully before we make the
decision. We might decide later that we could live without it or that
there is something else of greater value to us if we have waited just a
while more before we make a hasty purchase. More often than not, we
regret buying something rather than regret not buying something!
Principle 2: Unlimited wants but limited resources
When I was learning economics in junior college, we are
taught that we all have unlimited wants but unfortunately have limited
resources. Simply put, you cannot have everything your heart desires.
So when your children ask you for two things, take this
opportunity to teach them this principle by telling them that you can
only buy one of them and that they have to make a choice. (This is
regardless whether you can easily afford both items!) Even though they
may make the wrong choice and regretted the decision after it has been
made, you should not allow them to get the other item so soon. This will
enforce them to be more careful in making similar decisions in the
future before they proceed with it. Thus they will learn to treasure
their choices more.
For older children who can handle money themselves, you
can provide a higher allowance that includes toys/games purchases that
you used to cough up in addition to their own school allowances. With
this boost in their allowances, you no longer need to spend any extra on
their toys even if they come up short in trying to buy something. So if
they really want something, they just have to save up for it, even if
it takes months. They will surely treasure the item more and be more
careful about spending their limited money!
Principle 3: Working for money
While we do not want our children to go and find work and
neglect their studies, they should learn that making a living is not as
easy as it sounds. If possible, find ways for them to experience this
for themselves. It need not be a year long job, but it could just be a
vacation job, helping out a relative or close friend that you know. We
could also pay them to do some chores at home but there is also a danger
that they will later do chores at home only when you pay them. By doing
so, they will not take their allowance for granted and appreciate the
value of the hard earned money.
Principle 4: Paying themselves first
We should always put aside some money before we spend
because we know that there may be rainy days when we need the money for
some unforeseen emergencies or for the time we retire and need to draw
down from our savings.
Our children may not necessarily need such emergency
funds, but it is a good virtue for them to learn how to save from young.
By showing them that they deserve to be paid, and that they should pay
themselves first, they will likely end up with more savings at the end
of the month, rather than wait and see whether there is any money left
after all is spent and gone.
So get them to start setting aside some money from their
allowance for savings before they start spending. Start small at 5% and
move up till they feel comfortable with whatever they have left. A good
minimum long term savings rate would be 15-20%. If they can do this as a
child, it would be easier for them to carry on this discipline when
they are adults.
Principle 5: Making their money work for them
But it is not only important to save, it is also
important to make their money work for them. In fact, by saving and
investing, they also have the option to reduce their spending now so
that they can just use the interest and capital gains from their higher
savings for their future spending (what we call deferred enjoyment).
That is like having your cake and eating it too!
Start from the stable and trusted savings and fixed
deposits, to more sophisticated instruments such as bond and equity
funds when they can better understand them. Teach them how to search for
such information (newspapers, websites, etc) and make the right
judgment calls (if it sounds too good to be true, it probably is not
true!).
Principle 6: Helping others with their money
Besides trying to raise them to become money smart
adults, we can also train them to become money smart adults who are also
caring and cheerful givers. In fact, when we turn some of our focus
from our own needs to the needs of others, we are more likely to be
contented with what we have as there are others who are in much greater
need through no fault of theirs.
Therefore, get them to set aside some allowance for such
purposeful (and cheerful) giving to a charity of their choice. It could
be a small amount like 5% but that’s OK. According to a study, the
average person gives less than 1% of his income! Imagine how the world
can be made much better if people can find a way to open their wallets a
little bit more.
Principle 7: Lead by example
While the above principles are good on their own basis,
all that we try to teach our children will crumble if we ourselves are
not money smart. If we tell them to wait three days to think over before
making a purchase decision, but we ourselves buy on impulse in front of
them, we have no credibility. As the saying goes, our walk must follow
our talk! Show them that you follow the same principles that you teach
and they will more likely learn from you, their financial guru!
Ernest Low holds an MBA from University of Liverpool
and is the Head of Investment & Wealth Management with AXA Insurance
Singapore. He has also written a money management book for kids called
Starting Small Finishing Rich.
Hello! My team and I would like to share and discuss topics on financial planning especially on the topic of necessity, and how financial planning interlinks with our daily hectic lives in Singapore! Feel free to ask us any questions and we will do our best to answer any of your queries!
