Talking Ringgit &
Sense with your kids
What and when to share on
saving, spending and investing
“Son, we need to talk”.
It may be the way many conversations between a parent and child have started. And perhaps it is the catchphrase to signal that the “talk” would cover potentially uncomfortable topics such as sex, drugs or other growing pains.
In the same way, parents find talking about finances to their child equally uncomfortable, if not more so. In a survey conducted by T. Rowe Price in February 2012, called this “Fourth Annual Parents, Kids & Money Survey” parents find it easier to talk about bullying, drugs and smoking than family finances or investing1.
Perhaps that is true of many households where the weight of financial responsibility rests squarely on Dad’s shoulders. In “The Future of Retirement 6″ , an independent survey by HSBC Group in 2011, 65% of men surveyed globally said that they make all the financial decisions in the house without any input from others. Men also claim to exercise sole responsibility for household financial decisions.
Men may feel that the discussion of financial issues could bring about contention and anxiety, the very things he may feel a need to shield his family from. Some parents may tip toe about this topic because they don’t want to reveal how much they make or they fear their children may know and tell their friends about it2.
But a talk on family finance does not necessarily mean the disclosure of numbers. What’s important is the sharing of financial values and discussion of financial matters appropriate to the child’s age. Children are hungry for that kind of financial information. The T. Rowe Price survey1, which included interviewed with 8 to 14-year-olds, finds that “one in five young respondents said they want to know more about saving money, and almost the same proportion said they wanted to learn more about earning money.
Meanwhile , only half of parents say they talk to their children about saving goals and the trade-off between spending and savings. Far fewer teach their children about inflation and investing”2.
When parents take time to inculcate financial values, they may help their child grow up with a healthy handle on money.
Make time for money talk with your kids
As the last quarter of the year beckons, your family may be making many plans including year-end family holidays, home spring cleaning and festive decorations amongst others. You may also be considering a review of your child’s academic performance and curricular activities. Why not consider talking about your family finances too? It may be just as good a time as any to sit your spouse and children down for a discussion on where the family is heading financially. Here are a few useful tips to consider when you begin discussing finances with your families.
1. “Money should not be taboo but neither should it be the prime focus”
Talking about money should not be avoided but it should not be a dinner topic everyday either. It may make your children overly conscious of their family wealth or on the other extreme, feel guilty about spending money. Find a balance in financial discussions and to share only what is necessary at the moment that is relevant to their age.
2. “Discuss their lifetime goals with them”
You may want to help your child understand that some goals may take a large sum of money to fulfill. Consider helping your child understand why he/she needs to save or manage his/her money responsibly in order to achieve a larger goal in life. For example, should your child want to pursue a higher education, you can tell your child how you are saving for his/her education fund. If you have invested in the Takaful Education Plan, you can also show him/her how far you have saved for his/her education.
3. “Make it easy for them to grasp”
Financial discussions may be uncomfortable due to the difficulty in explaining financial jargon to children. To make it easier, you may consider treating the family finances as a balance sheet of a corporation. Tell them how the money came in? How was the income used? Did your family make large purchases? How can everyone improve their saving habits? You do not need to reveal specific numbers but giving them some knowledge of how money flows in your family may help them understand your family’s financial status.
4. “Clarify your financial spending expectations with them”
You may want to help them understand their role in family finances. Some questions to ask your children include their spending expectations for the year. Do they foresee any additional expenses for extra curricular activities or school trips which require financial support?
If you have teenaged children, do they have plans to take up some part-time work which will help them build confidence and earn some extra pocket money?
Make it practical
Money skills are best learnt through practical means. You may wish to provide money handling opportunities to your children, via a weekly or monthly allowance. This may give them the opportunity to practise financial skills. Once they receive an allowance, you may want to teach them to proportionate their allowance for various needs such as buying food at school, birthday gifts for friends, entertainment and saving up for things that they want.
You may also consider allowing your children the actual experience of living on a limited amount over time. It may teach them the true value of money – that each dollar can only be spent once, and any money consumed today is gone forever. So when your child blows his allowance on something frivolous, tough as it may be, it may be better to let him experience the consequence of his action. Simply giving him more money to “rescue” him, may unconsciously train him to pursue instant gratification, impulse shopping, and spending money without consequence. Instead, you may consider giving him a “loan” which he needs to repay and teach him an invaluable lesson on debt.
As parents demonstrate good financial habits through their own behaviors, children will observe and learn. In the same way, when parents openly discuss family finances, it may make it more likely for children to develop financial confidence and help them handle money responsibly.
How much financial information should you share?
Talking about financial matters isn’t about revealing specific numbers such as your income or debts. It is to openly discuss money matters in order to teach your child what they need to know to live a financially smart life. Take a look at this guide and tailor it for your discussions with your child.
M is for Money. You need it to buy things.
Prepare a set of coins and notes. Help your child identify the value of the denomination and things that cost money, eg. RM1 for an ice-cream, RM20 for a book.
When you work, you earn money.
Tell your child about your job. Take a walk around the neighbourhood and show him/her people at work, eg. the bus driver, waiter, business people. Ask him/her what he’ll/she’ll like to work as when he/she grows up.
Money is for the 3S.
Get 3 jars. Label one for “Spending” one for “Saving” and one for “Sharing”.
Sometimes, you have to save up to buy something you want.
You may want to tell your child that he/she may dip into the “Spending” jar to buy small items such as tidbits from the convenience store.
Consider encouraging your child to save a portion of his/her coins in the “Savings” jar so that he/she can buy a toy when there’s enough.
Money is not only for yourself, you can use it to help others.
Consider teaching your child the value of generosity. Look for charities he/she can donate to from his/her “Sharing” jar.
C is for Choices.
What do you choose to spend on?
You may help your child differentiate needs and wants. At the mall, point out essentials such as food and clothing. Then ask your child to describe items that he/she may want but are optional. Tell your child if he/she spends his/her money on one thing, he/she will need to forgo the other.
Money can be stolen.
Consider teaching your child how to properly keep his/her money. Let your child know that it is unsafe to share any personal and financial information such as address, phone number, savings account numbers when he/she is on the computer. If your child wishes to purchase anything online, it must always be with your guidance and permission.
Money can be kept safe in a savings account with the bank and the bank pays you interest too.
Open a savings account for your child such as the Premier Junior Savings Account. Every few months, make a trip with your child to the bank to deposit the savings.
P is for Percentages.
Encourage your child to view money in percentages, eg. save 10% (10 sen for every RM1), share 20%, spend 30%, etc. This may serve as a disciplined framework to help him/her even as he/she moves into adulthood and handles larger amounts of money.
You can grow your money. The earlier, the better.
The earlier you save, the faster your money can grow from compound interest. Do a simple compound interest calculation to show your child how much he/she can save should he/she start saving at age 13, compared to saving at age 30.
Consider a “matching plan” for your child’s savings: You put in 25 sen for every ringgit he/she saves.
C is for Cash or Credit? What’s the difference between cash and a credit card?
Show him/her your credit card and explain that a credit card is like a loan and interest will be charged if you don’t pay your bill in full every month.
Discuss why a credit card is useful eg. for making purchases online, you don’t need to carry a lot of cash with you and it offer rewards and privileges.
However, one should use a credit card only if he/she can afford the product he/she wants to buy. Failing which, he/she may be at risk of defaulting and fall into debt.
You may also tell your child that due to security concerns, credit cards are only issued to persons ages 18 years and above. If you wish, you may tell your child when you may provide him/her a supplementary card (eg. When they turn 18 years old or when the leave for college).
The importance of a savings and spending plan.
Before your child leaves for college, help him/her develop prudent spending and savings habits. With your child, fill out an Income and Expenses budgeting worksheet to help him/her grasp how his/her allowance is spent and saved each month.
How to prepare financially for college.
If you have invested in an education fund for your child, such as the Takaful Education Plan, share with him/her where you’re at in your fund accumulation. Suggest ways in which he/she can help out too such as depositing a portion of his/her savings into the fund.
I is for Investments. Help your child get started with investments.
To prepare them for when they start work, you may help your child develop investment goals eg. buying a car in 5 years and an apartment in 10 years time. Suggest types of regular, automatic investments that may be suitable in achieving the goals, such as Unit Trust Funds with a standing instruction for monthly contributions.
Use the “Rule of 72″ to estimate how many years it would take to double his money, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, he/she can make a rough estimate of how many years it will take for the initial investment to double. Eg. if your child invests in an account that earns 8% interest p.a, he/she will double his/her money in nine years (72 divided by 8% = 9 years)3.
Also, don’t forget to caution your child on the risks and expenses he/she may incur.
If you plan to provide your child with a supplementary credit card, lay down some ground rules.
Consider explaining why your child should not use a credit card to buy something that he/she can’t afford to pay for with cash.
Let your child know that he/she should use his/her credit card only if he/she can pay off the amount owed in full each month, otherwise, he/she would be charged high interest on the outstanding credit card balances.
Help your child understand that any late payments he/she makes will also affect your credit history.
If your child is stepping into his/her first job, explain his/her contribution to income tax and the Employees Provident Fund (EPF).
Consider discussing the difference between gross pay (before taxes are taken out), net pay (the amount you take home) and why paying taxes is important. You may also tell your child about his/her contribution towards EPF and how that helps him/her in the future.
Better be safe than sorry. An insurance plan is important.
Explain to your child that an insurance plan functions as a safety net in the event of unforeseen circumstances. Tell him/her that there are plans that provide medical benefits, Personal Accident and critical illness payout, depending on his/her needs.
The importance of an emergency fund when they begin their work life.
Consider discussing with your child the importance of an emergency fund to tide things over especially when the unforeseen happens. Help your child start with a list of expenses (rent, bills, food) to estimate the amount he/she spends each month. Save up to three months, worth of expenses in a high-interest bearing account.
1. T. Rowe Price. “Fourth Annual Parents, Kids & Money Survey” March 2012.
2. US News, Money, Personal Finance, “Parents: Stop Being So Awkward With Money” 11 April 2012.
3. Investopedia.com, “What is the ‘Rule of 72’?”
Adapted from “Money as your grow: 20 Things Kids need To Know To Live Financially Smart Lives,” by Beth Kobliner for the President’s Advisory Council on Financial Capability, 2012, published on www.moneyasyougrow.org.