TEACH YOUR CHILDREN WELL - PART 2: TEENAGERS

Is your teenager ready to manage money in the real world? Discover how to build the financial awareness and street smarts they need for adulthood.

Welcome to Part 2 of my articles about teaching your children well. Everything discussed in Part 1 naturally also applies to teenagers in high school.

In Part I, I alluded to the importance of introducing children to the value of money and instilling the understanding that not everything is free.

There was an undertone that it is important not only to understand money but also to recognise that sharing (gifting) is one of the most admirable traits of being a good person.

Sharing and gifting does not only have to be in the form of money or material items; it also includes acts of kindness and physical support for those who need it.

Ironically, it is often those who have fewer possessions and less wealth than the average person who are best at gifting and sharing. They also seem to appreciate what they have more than most other people.

In this article, I would like to move on and discuss how teenagers progressing from primary school through high school can become street smart in preparation for adulthood and responsible money management.

In modern society, most children in late primary school and everyone in high school have a smartphone and probably a laptop or tablet and in many cases all three.

This provides young people with access to information and ease of communication, but unfortunately, also makes them prime targets for fraudsters and the distribution of unwanted information and newsfeeds, but that is a different story.

The pros and cons of managing money as a teenager

With great freedom comes great responsibility.

1. Understand the risks of using banking cards and electronic devices

• Professional fraudsters are at it 24/7 to defraud anyone with a bank account or who wants to pay for something with a card or a device.

• Don’t let anyone else use your card or device for payments.

• Don’t give your bank account number to anyone, and more importantly, do not share your PIN or passwords, not even with your best friends or with people who phone you and claim they are from your bank (this is how most fraud and theft takes place).

• Don’t use the same password for different devices.

• Treat every phone call as a potential fraudster.

2. Start teaching your teenagers about investment and money management principles

• The snowball effect. First and foremost, understand the most powerful investment “magic”, namely compound interest. Let your children do their own research. You can only teach them if they want to learn. There are many easy-to-read books and comments from investment professionals, such as Warren Buffet, that describe the power of compound interest.

• Understand the difference between investing and speculating. Investing in a share or a fund must be with the mindset that you are going to keep that investment forever. That is investing. Watching your investment values regularly and changing your portfolio often is speculation.

• Investing relies on research and skill. Speculation relies on timing and luck. Long-term wealth is built through investing. Wealth gets destroyed through speculation.

• Unless you are skilled, invest in managed funds or passive funds rather than direct shares.

• Don’t trust platforms and “coaches” offering models and “teach” you to read graphs and triggers for when to buy and when to sell. That applies to shares, crypto and currency trades. They profit because you pay them for every trade, whether you make or lose money.

• Adopt the three-jar principle described in Part 1 and let compound interest work. The earlier you start, the wealthier you will become and the sooner you will be able to buy some of the things you like without borrowing money. As I mentioned in Part 1, don’t create the impression that you can always get what you want. Sometimes you have to wait a bit, and sometimes you will be disappointed and not get it at all. In Part 1, I referred to delayed gratification.

• Teach your child about risk versus reward. To achieve decent returns, you must invest in riskier assets such as company shares. Illustrate the effect of a 1% higher annual return over a 20-year period. There are many online financial calculators that one can “play” on calculate the impact of higher and lower returns. If you can’t find one, let me know.

• Let them learn about different asset classes like shares, bonds, cash, property and crypto. Let them explain their understanding of crypto to you and see if you agree.

3. Explain the difference between good investments and bad investments (liabilities)

Use practical examples such as property. Property in a good area that generates a decent rental income will increase in value and is a good investment. Property in an old, deteriorating neighbourhood next to an informal settlement, where crime is rife, cannot attract decent tenants and loses value. This is a bad investment.

4. At a school-leaving age you can elaborate about the benefits of using gearing (good debt) to buy investment properties earmarked for rental and wealth creation

• Explain, with examples, how much credit really costs.

• Show them examples of how much you actually pay for a vehicle over five years if you finance it versus buying it cash.

• Get bank information on credit card interest rates. Help them understand that a credit card shouldn’t be your go-to for purchases. Use the three-jar and save for what you want rather than buying it on credit.

• Let the same bank provide details of the interest earned on its various products, for instance, savings accounts and fixed deposits. Let your child compare the interest earned with that of unit trust money market investments and other funds. Unit trust pricing is published in newspapers daily.

5. Explain good credit and bad credit

• Good credit is used to finance investments such as a house.

• Bad credit is credit offered at a high interest rate to buy consumables or “nice-to-have” items, typically through credit card purchases.

6. Start discussing estate planning

• Many high school children have to deal with a parent’s passing. Prepare them in case it happens.

• Explain how family dynamics will change. It may be that an older son takes on the role of the man of the house.

• Discuss the financial impact of either parent or both parents passing away.

• Explain the role of life assurance, retirement planning and risk management. Also explain what you have in place to protect your family financially should you pass away.

• If you have a family trust, explain how it operates. Who are the trustees, and what are their roles? Who are the beneficiaries, and do they have any rights? It is important for children to understand that they do not have unfettered access to trust assets. It is not “their” trust, as young people often say.

• Discuss your will and how the proceeds will be distributed in the event of your death. A youngster just entering high school may find this intimidating and a bit much to absorb, but a young adult over sixteen will understand it much better if you explain it properly.

7. Talk about the ‘wants’ and the ‘needs’

• Often youngsters want something but they don’t really need it. Refer to Part 1 about not getting everything your heart desires.

• Brand awareness can be costly. Remember the trade-off mentioned in Part 1. For everything you want, you must forfeit something else. By accepting a non-branded item, there may be enough surplus funds to buy a second item. This may be a tough one for teenagers who are very brand-conscious to accept.

Try to get your children interested and inquisitive in investments. The more questions they ask, the better their chances of making good investment choices in the future.

Suggest that you start an investment with them. There are platforms that require very low monthly and ad hoc investment amounts. Let your child choose a portfolio, and you choose one.

Monitor the returns every three months to see which performs better, but agree that no changes may be made to the portfolio for at least two years. Only new investments can be made in new funds. Previous funds must remain as is for at least two years.

Encourage family members to give smaller physical gifts and include cash with the gift. After applying the three-jar principle, top up your child’s investment portfolio with the gifted funds, but let them choose the funds. You can incentivise them to invest the funds by offering to match the amount they invest.

Investing can be fun. Don’t let your children grow up to be intimidated by investments. We encounter too many adults who face this dilemma.

Invest well and have fun!