Teaching kids valuable financial lessons for the future
Get rich quick schemes rely on people not understanding that the road to wealth isn’t quick, it’s about consistent saving and a long-term investment strategy. 
A healthy habit
A sensible and practical saving attitude can start when we’re very young. In fact, some experts recommend educating children about money as soon as they learn to count.
According to the Australian Securities and Investments Commission’s FIDO website, children should know that money is a limited resource and not something that just materialises from a ‘hole in the wall’.
So, whether you give your child an ambit allowance, or pay them for small tasks around the home, it’s a good idea to lay the savings foundations so they develop a healthy habit and put a little away each time they get ‘paid’.
Windfalls
It isn’t long before birthday cards with money replace toys from aunts and uncles. If your child has financial goals they want to reach, then birthday money can help them reach those goals faster.
By developing an appreciation of money and what it can bring, you can influence how your child manages larger sums of money from any windfalls they may receive in the future. It might only be $20 to you, but to a child, it’s a lot of money.
Work for it, kid
The New South Wales Commission on Children and Young People[1] reported more than half the children aged between 12 and 16 in New South Wales had an after-school job. It also found working had little or no negative impact on their lifestyle.
Teenagers benefit from having an after-school job in a number of ways. Not only do they get paid, but they also learn about tax, hourly rates and managing their study around their working hours.
So when the time comes for your kids to get a part-time job, it’s a good idea to help them set a financial goal to save for, rather than them frittering their wages away.
Whatever the situation, young people with part-time jobs can be taught good savings habits that will last a lifetime.
The first real job
The first real job out of school, TAFE or university is an exciting time for young adults. It might be the first time they’re fully financially independent or it could be a natural progression from their part-time work.
The first real full time job could come with a salary package of anywhere from $30,000 pa for an accounts clerk up to around $70,000 for a qualified accountant[2].
While part of that package is compulsory super and tax, where kids live at home with mum and dad and pay only token rent, the rest is disposable income.
Money lessons learned earlier in life can really come into effect here. Credit is easy to get, but hard to get out of. Car loans and refinancing for holidays can easily bring young people unstuck.
Young adults aged in their early 20s should consider a long-term savings strategy. A small monthly investment could provide a significant boost when the time comes to buy a home.
Case study
John is a first year accountant who lives with his parents in Sydney. He earns $55,000 pa. Apart from paying off his car, John has no debts. He pays a small amount of board to his parents. His father suggests he starts saving a deposit to buy his own home, gives him $5,000 to start him off and John will add $250 per month of his own money.
John is comfortable with the additional risks involved with sharemarket investing and borrowing to invest. After speaking to a financial adviser, he is considering the following options:
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Opening a savings account.
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Investing in a managed share fund.
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Leveraging his managed share investments using a margin loan. Here we have assumed he makes an initial investment of $15,000, consisting of the $5,000 from his dad and $10,000 from a margin loan. He will also use a margin loan to increase his monthly investment to $750.
The below table illustrates the power of managed share funds versus a savings account. Combined with a margin loan, the investment difference is significant.
Note: Before you borrow to invest, you should understand that if your investments fall in value, you could be significantly worse off than if you don’t borrow to invest.
|
|
Savings Account* |
Managed Share fund* |
Managed Share fund* and margin loan |
|
|
$43,503 |
$54,996 |
$65,021 |
*Assumptions: Savings account provides interest of 4.45% p.a. The managed share fund generates a return of 8.5% p.a. (split 3% income and 5.5% growth) and the franking level on income is 75%. Interest on the margin loan is 8% p.a. John’s marginal tax rate is 31.5% including a Medicare Levy of 1.5%. These rates are assumed to remain constant over the investment period. With the margin loan, where investment income and tax benefits are insufficient to meet interest payments, a portion of the investment is sold to cover the shortfall. Otherwise, the excess investment income and tax savings are reinvested. All figures are after income tax (at 31.5%), capital gains tax (including discounting) and repayment of any loans.
Be realistic
In much the same way that fad diets don’t work, it’s better to moderate your saving and spending to find a balance.
In John’s case, starting out with a small amount of $250 a month was designed to make his long term saving painless. He would still have enough to pay off his car, buy clothes and pay for entertainment.
While a margin loan comes with its own risks, the interest can be offset against tax. If he chooses stable investments and invests over a long period, he can minimise his risk. As his salary increases or he becomes more serious about buying a home, he can increase the amount he puts away.
Probably the best relationship a young person could forge early in their working lives is a relationship with a financial adviser.
[1] NSW Commission on Children and Young People, 2005 ‘Children at Work’.
