Why? Because saving is for suckers!
My kids don’t have a bank account. They also don’t have a job.
For a regular income they get an occasional allowance or do odd jobs. To get more money, like many children, they will get money for their birthday from friends and relatives or they will simply stick their hand out and ask Mum or Dad for some cash. We are trying to convince our kids to get rid of some of their unused ‘stuff’ (depreciating assets called toys) on ebay. They, on the other hand are trying to convince us that having a bank account is a great idea. Plus the bank will give them prizes and rewards for making regular deposits and everything!!!!
Let me state that my children are aged 8 and 11 years old. Yours may be younger or older but the following is still worth serious thought and discussion at the dinner table. Yes we talk about this stuff as a family. Where else are they going to learn about it?
Children don’t have real expenses or financial responsibilities to help teach them how to manage money. Having cash to count is tangible. They can count, manage and sort their cash in money boxes, envelopes, their wallet or purse or even buy a cheap safe from Bunnings. My view is that this approach to money is a much better investment than teaching them to be reliant on an institution for some future fantasy of well-being. Children under 18 years old are taxed at 66% if they earn over $416 per year unless you satisfy certain rules or add their income to your tax return.
As adults, for the most part inflation just simply eats away our savings and saving into bank accounts will be taxed at our highest rate of tax. In other words it will be added to your earned income and taxed accordingly; this is usually 30%, 40% or more depending on your other income.
I had to explain to my children, that $200 in their bank account for a whole year at 3% interest will ‘earn’ them $6 in interest. “I can make that much by just doing some extra jobs!” my youngest wailed. Out of the mouths of babes, a lesson that many adults are hard pressed to comprehend. You need your money to work harder than you do. It takes time and the right strategy but it is worth the effort. With such low interest rates, savings in a bank account is hardly worth the effort financially, particularly if you have $5,000 or less. In a high interest rate world this may be different.
Chasing high interest rates on savings accounts can be a trap that many adults will fall into. If you have a mortgage you are far better setting up a loan interest offset account to save funds into. Banks charge higher interest on loans than they pay on savings and the interest offset is tax free. So if little Johnny or Jane has $1,000 offsetting your loan at 5% interest for a whole year they just saved you $50 in interest. This, is a worthwhile conversation and one that is about 2% more profitable than a ‘savings’ account. Interest rates on transaction or as I like to call them, ‘spending’ accounts are even lower. (next to nothing in fact).
If you don’t have a mortgage you will need to consider other investment vehicles in low tax environments such as superannuation. Professional advice is essential before taking any action.
With all of that said my wife and I have agreed that our children can open a bank account when they have saved $200. “What if we want to spend some money before we have $200 saved?”
“Then you don’t really need a bank account and you can just stick to earning virtual reward points for trinkets on your computer games”.
Unless you are seriously cashed up or have a part time job, usually in your mid to late teens you really do not need a bank account.
There are much smarter ways to approach educating kids about money and it will certainly change as they get older, but first you need to know the rules of money. And together you and your children will need to agree on the rules relating to their money.
My top 5 suggestions:
- ‘Tax’ their allowance. It is a good life lesson. Turning a $10 allowance into $7 for the use of services may seem mean spirited but is a great life lesson.
- Make it tangible. Cash is real, touchable and spendable. Not an abstract concept on a swipe card or mobile phone. Think about the game of monopoly. Better still play it!
- Address their money personality. Be a spender by all means but set some spending limits and keep within them. A mantra we use with our clients of all ages is ‘don’t go crazy, but don’t go without!’
- Lend your children money. Introduce them to the concept of borrowing and paying back funds. Good debt and bad. Immediate benefits or trade-offs to earn bigger rewards. This can be linked back to toy shopping for larger depreciating assets and the concept and cost of interest.
- Charge them rent! Ok this is for the older ones. Linking a mindset to the time and effort economy and making the cost of accommodation a reality is good to learn early. Without this you will have little to no chance of teaching your kids to fly financially and eventually leaving the nest.
Subsiding your children’s lifestyle into their twenties and beyond will impact on your retirement plans whether you can afford it or not and regardless of if you choose to admit it. Teenagers and older students have 3 main forms of expense, FOOD, FUEL and FUN! Plus the odd designer t-shirt and jeans. Basic needs as well as further education requirements are usually covered by the bank of Mum and Dad.
Then there are the cars! I come across young people all the time who save for years for a car then spend crazy dollars modifying them. Modifications funded by the wrong type of debt. Credit cards and personal loans. But boys will be boys, and boys, myself included like toys!
This financial situation usually comes to a head when ongoing running costs, including insurance can’t be met. A better use of funds would be to get a small loan using some deposit funds from savings for a newer car or to buy a cheapie and risk not being the coolest kid on the block. Financing a car might cost say $400 per month in payments over 4 or 5 years allowing a student to effectively pay as they go while continuing to work part time. With cars you are ALWAYS chasing the reducing value of the asset. However the advantages of funding a purchase with a little debt are as follows:
- You could have twice the car for a fraction of the ongoing costs.(including insurance costs!)
- A regular commitment to a newer depreciating toy = Discipline & motivation.
- To be able to continue to save for real-estate or invest into the share market and earn investment income from the age of 18 onwards rather than being behind the 8 ball….
- Establishing a good credit history early in life.
- Less vehicle maintenance worries.
- To still have a growing pile of cash at hand for emergencies and of course, food, fuel and fun!
Toys!!! They can be fun if they are affordable or better still paid for by your investments, but can be a great pain if they drain your time and effort or cause you to give up other things that you enjoy. This hurts more if the toys end up owing you more than they are valued at when it comes time to sell them. Many people I meet with that are in their early to mid twenties are still paying for cars they don’t own anymore yet trying to get into the property market.
From here you can have a candid conversation about cash or simply let your kids loose in the candy shop. If you help your children to save with a purpose and structure things right you can give your children a great head start in life. I wish I knew this stuff thirty years ago.
These concepts and much more are detailed in my new book Your Money Boat. Available at www.paulmollica.com or in all good book stores.