27 October 2011
One question we are often asked is “What is the perfect age to start teaching your children the value of money?”
Very simply, it doesn’t matter what age your children currently are; now is the perfect time to help them. Ideally, as soon as you have made the decision to have a child you can set up the foundations for their financial security.
The first step to establishing a good foundation is to open up two accounts for your child; an Education Account and a Wealth Account. Both of these accounts involve the funds being invested into long term assets which provide high returns. It’s all about having your money working harder for you and taking advantage of compound interest – you don’t need tons of money to create great results as long as you start early.
This is exactly what Nicole (one of the directors of Money Toolkits) and her husband Reine did when they found out they were expecting their first child – Chase. They decided that they would open up a bank account (for Chase’s education) and an investment account that he can take over once he is old enough. As they were given more pre-loved clothes and toys for their son than he could use, rather than gifts for his day of birth, they asked their family to contribute money into one of these accounts to help invest in his future.
While your child is very young, you are responsible for contributing to and managing these accounts. Once you are confident your child has demonstrated that they can manage these accounts and they are legally able to own the accounts, you can transfer the ownership to them. You should decide when this occurs based on the results you see your child achieving in earning and managing their other money.
In Nicole and Reine’s situation, they anticipated commencing monthly contributions into both of Chase’s accounts as soon as he was born, with the expectation that once Chase is earning his own money and understands what is happening, they will encourage him to also make regular contributions and eventually take over both accounts.
Paying for your kids’ education may well become the largest expense you commit to when raising your children, particularly given that the majority of young people choose to complete a tertiary education. The term ‘Education’ includes both traditional education and also learning from other experts in business, finance and life skills.
To avoid your children having to pay a large debt at the end of their education, set this account up and regularly deposit money into it. Depositing as little as $5 every week can make a substantial difference to the amount of debt for education that may otherwise be incurred. If this seems to be too much of a stretch for your family budget right now, consider depositing some of the money given by family members and friends for your children’s birthdays or Christmas presents. Providing your children with the gift of having a debt free education can far outweigh the short-lived pleasure gained from receiving a new toy or gadget that they quickly out-grow, break, or tire of and cast aside.
Once your children start earning their own income, teach them that a percentage of it should be deposited into this Education Account every time they are paid. Your children will then be miles ahead with their financial IQ and enjoy the freedom of having little or no debt at the end of their formal education. This process also teaches them the habit of investing in themselves through lifelong learning and empowers them with the knowledge they require to reach their full potential!
Wealth Account – the Money Magnet
Parents can also achieve great results by setting up a Wealth Account for their children and depositing money on a regular basis using the same strategy as outlined for the Education Account. Using a Wealth Account utilises the pay-yourself-first concept that the wealthy have followed for years. This means that no matter what happens, you are consistently making a monthly payment to the Wealth Account for investing the first priority.
The only difference between this account and the Education Account is that the funds accumulated can only be used for purchasing investments. All returns generated must be reinvested, allowing the funds to compound. The aim is for your child to accumulate enough assets to generate the amount they require to fund their lifestyle from the income generated through owning the investments.
We refer to the day they achieve this as Financial Freedom Day whereby one’s lifestyle is funded by the income generated by the assets within this account and you no longer have to work. You are then able to choose if and when you work for money!
We call this Wealth Account the Money Magnet Account as this is the account that will help your child reach their Financial Freedom Day in the long term because the money in it attracts more money like a magnet!
As your child grows older and is able to comprehend more complex concepts, start conversations with them around the benefit of having money working for you rather than you working for it; what compound interest is and investment options to take advantage of higher returns. Review this account with them at least each quarter, so they can see it growing for themselves.
If these concepts seem a little overwhelming at first, remember the more you learn, the more they learn and the best way to learn is to teach, so you will be amazed at how much you learn as you start to teach your kids the value of money.
Of course as your children’s needs and (most likely) wants begin to increase, you then help them set up separate savings accounts to purchase larger items. This will teach them the importance of managing their money and to set goals for things they want.
These concepts are explained in detail and learned through using the MAGNET Money® system which is described later in the book. The MAGNET Money® system was designed for children aged 10 years or older. Check out our website for further information.
Separate Accounts for Each Child
If you have more than one child, we recommend setting up separate accounts for each so that when the time is right, you can sign over the accounts to each of them to manage for the rest of their lives.
After all, they are always going to need money and will always be learning.