Five ways to set your kids up for financial success
How to get your children started with shares and saving in today's climate.
I'm a firm believer that it's never too early to learn about money. When I think back to my childhood, I can pinpoint the exact time when I started to develop a keen interest in financial services – it was when I was 12 years old and my father bought me my first shares (which I still have today).
Being introduced to the world of trading ignited that fire in my belly, and I wanted to learn everything there was to know about share trading and companies. I'd jot down the share price of companies on a piece of paper (which seems very old school now) and study their movement over time. When I looked to buy new shares, I'd spend my weekends managing a mock portfolio where I'd research companies, dive into reports and track the latest price movements.
It was this interest in share trading that motivated me to get my first job as an investment accountant at BNP Paribas so I could keep investing and learning. It was also this interest that put me on a pathway to Finder, and shaped my role within the business.
Looking back, there were other moments in my life that have influenced my interest in financial literacy. During the 1991 recession my parents were forced to sell the family home so they could make ends meet. At this time, interest rates were just south of 20%, which are levels unthinkable today. This experience really opened my eyes to the importance of always having a buffer in place for a "rainy day".
Fast forward to 2020 and the economic fallout of the COVID-19 pandemic has proven just how important financial literacy is to help people make decisions during a crisis. Many Aussies applied for a mortgage repayment "holiday" while others accessed their super early. While these decisions may have been a last resort for some, for others it could have come down to a lack of understanding of how these choices would impact their financial position.
For instance, on a $500,000 loan at an average variable rate of 3.90%, if you paused repayments for 6 months (after 10 years), you'd fork out an extra $11,127 over the remaining 20 years of the loan (assuming a 30-year principle-and-interest loan). Again, this demonstrates why we need to continue to educate people about their personal finances and in my opinion the sooner we do it, the better.
All of this reminds me of the importance of improving financial literacy across the country. As a parent myself, I think parents have a key role to play in influencing the money habits of kids. Here are my five suggestions for actions which I think you can take as a parent to really help set your kids up for financial success:
Open their first bank account: Learning how banks work is an important step in anyone's financial journey and the good news is most kids' bank accounts allow you to earn interest. This could be through the standard variable rate or though bonus interest when certain conditions are met. The balance limit is generally around $5,000-$10,000 for the bonus interest, but if your child is less than 16 years old and earns $420 or more in a financial year, the financial institution will withhold tax if you don't provide a tax file number (TFN). Keep this in mind when setting up the account and check out Finder to compare accounts side by side.
Pay their pocket money through an app: Pocket money is a really important tool to help your child understand the value of money. Whether you choose to give money in relation to chores or not, using a pocket money app such as Spriggy, ZAAP or Revolut Junior brings the experience into the digital age. After all, most of us are managing our money through apps as adults these days so why not start learning these digital money management skills early too.
Incentivise your child with a savings goal: Research from ANZ has shown that active saving is one of the key behaviours that leads to financial wellbeing. This means that the earlier you can build a savings habit with your child, the more likely they are to thrive financially later in life. One good trick for achieving this is to ask your child to save for some or all of that major purchase that they keep asking for – a new pair of trainers or a game console, for example. The pocket money app you've set-up should be perfect for this and when they've saved their own money for it the purchase will feel all the sweeter.
Set up an education or trust account: At some stage as a parent, you'll need to make a call on your child's education and what you'll be able to afford. The earlier you start saving the more achievable this will be. Start by estimating how much you think it will cost for your child's primary, secondary and/or university education. This will give you a ballpark target for your savings and setting up a trust account to pay this into can be a great way to keep this money separate. With a trust account you retain ownership of the account as the trustee and once your child turns 18, they can access the funds. Remember to increase the annual amount you contribute so you can factor for inflation.
Buy their first shares: With record low interest rates, there's never been a better time to teach your child about diversifying their portfolio. It's possible to create an online trading account and earmark it as being for the benefit of a minor. As the trustee, you'll hold the shares until your child turns 18 where you can transfer the shares into a brokerage account held in their name – the benefit here is capital gains tax (CGT) won't apply as there's no change in beneficial ownership. However, if your child owns shares and earns more than $416 in dividends and/or capital gain, you must lodge a tax return on their behalf. Introducing them to shares could spark their interest in investing and change their life for the better (as it did with me). You can learn more about buying shares for your child on Finder.
The financial services market has changed drastically over the years. With more competition and choice and things like risk-based pricing, it's never been more critical for us to be financially literate particularly during uncertain times.
I truly believe that the more we can do as parents to set up our kids for success, the better. I know for sure that it was the small things my parents did that set me on the track I'm on today. Who knows, maybe if you do the same for your children, one of them might even set up the next Finder.
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