Kamal Patel, Financial Adviser at Old Mutual Personal Finance

Parents are often reluctant to talk to their children about money. However, research shows that the home is the primary source of financial education for kids. As uncomfortable as you might feel, talking about money with your children is an essential part of their upbringing, because the lessons they learn will strongly shape their financial futures once they leave home.

This year’s Global Money Week, (16-22 March), which has the theme “Smart Money Talks”, aims to highlight the importance of open conversations to boost financial confidence, literacy, and resilience among young people, Kamal Patel, Financial Adviser at Old Mutual Personal Finance, says these conversations need to begin at home.

Kamal refers to a study conducted by US investment firm T Rowe Price (The Parents, Kids & Money Survey*) which found that children overwhelmingly look to their parents for advice on money. The study found that 70% of children aged 11 to 14 said they turn to their parents as their most trusted source of information on money matters. However, as they get older, kids increasingly turn to social media for financial advice, the survey found.

“The money lessons your children learn in their early years will have a profound impact on their financial well-being as adults, shaping their ability to achieve their dreams and weather life’s storms. With a firm financial grounding, your children are less likely to be influenced by bad advice, adopt bad financial habits, or become the victims of scams,” Kamal says.

He suggests money conversations in the home may be grouped under four themes:

1. Responsible money management

This is the practical, day-to-day side of household finance: your income and expenses, the value of money, needs versus wants, sticking to a budget, and being wary about debt.

“From an early age, when your children accompany you to the shops, you can point out what different items cost and explain the difference between things you need and things you want, or nice-to-haves. You can have conversations about how money is earned and how important it is to have earning power and be self-sufficient, rather than expecting others to provide. Importantly, your children must be aware of the dangers of credit and debt. As financial experts often say, buying on credit is borrowing from your future self, and it comes at a high rate of interest,” Kamal says.

2. Building wealth

These conversations should be around saving and investing and the power of compound interest.

“Your children should learn to differentiate between shorter- and longer-term financial goals, and the benefits of delayed gratification. They also need to know the difference between assets that appreciate in value over time, such as a property or savings in a unit trust fund, and those that depreciate, such as a car or a washing machine. Explain to them how the value of an investment can compound by delivering returns on reinvested returns,” Kamal says.

3. Protecting assets and managing risks

Financial risk comes in many forms. There are risks to one’s investments, which range from market risks to scams, but there are also risks to one’s life, health, and material possessions, which can be financially devastating.

“Investment risks can be managed through diversification and taking professional advice. Explain to your children how to tell whether or not financial advice is in their best interests, especially if they source it on social media, and how to recognise investment scams, including asking the question ‘Do the returns promised sound too good to be true?’

“Regarding risks to life, health and property, your children need to learn about the protections offered by medical aid cover, life, disability and severe illness insurance, and short-term insurance,” Kamal says.

4. Estate planning and inheritance

This is a sensitive topic to tackle, because it involves death – your death. But once your kids are old enough, the conversation around financial arrangements on your passing is a vital one.

“Your children don’t need to know the specifics of your will – you don’t want to create premature expectations. But you do need to discuss arrangements that will make things easier for them in dealing with your estate. Explain the role of the executor and the procedure of winding up the estate and distributing the inheritance. Tell them where documents, passwords and assets are located and whom to call when it’s time,” Kamal says.

“Ultimately, while some of these conversations may be difficult, you will help your children acquire the knowledge and skills to give them a financial headstart in life,” he concludes.

Ed’s note: EBnet.Kids has great content for you to share and learn with your kids. Check it out here.

ENDS