TEACH YOUR CHILDREN WELL - PART 3: EARLY ADULTHOOD

Prepare your young adult for varsity life and financial realities of independence by teaching them to manage debt, protect their income and plan for unexpected family challenges.

In the two previous articles, I alluded to strategies and motivations for why children must be introduced to financial literacy and knowledge early in life. Parts 1 and 2 focused mainly on children during their school years.

During these years, the focus should be directed more towards habits rather than the technical side of investing and personal financial management.

When teenagers reach matric and prepare to further their careers, parents must also adjust their guidance and prepare their children for the challenges they will face as young adults.

Varsity life is very different from the protection of parents’ homes. The newfound freedom away from parents’ watchful eyes brings new challenges and temptations. It is time for young adults to show responsibility and discipline on multiple levels while enjoying varsity life.

This is where friendships and often future business associations form. The challenge is just as great for parents. This will be the time to test how well children were taught about social responsibility, time management and financial discipline.

We often encounter recently qualified graduates who start their careers with student loan debt. Some carry the debt for many years after graduating. The motivation is often the terms of the debt, such as low interest rates and agreements to repay only interest.

That is a strong incentive to use a student loan for things other than paying for education. It may make sense at the time, but it is not the best financial management practice.

At this stage of life, young adults can be introduced to deeper family financial matters. It is important that previous discussions around parents ‘ estate planning are understood and taken to a deeper level.

It is also time to start talking to young adults about their own estate planning and protecting their income.

There is a fair probability that a university student will, during their years of study, lose a close loved one. If we include grandparents in this circle, the probability rises significantly.

This means that, at some level, students may have to deal with bereavement, financial challenges and family trauma. If a breadwinner passes away, the student’s responsibilities and financial challenges may change drastically, either positively or negatively, depending on what provisions are in place.

The student will, in all likelihood, have to provide emotional support to a surviving parent and may even have to move home for a short while or longer, depending on the financial affairs and family structure.

These probabilities need to be discussed. Better still, have financial readiness in place to prevent major disruption.

Entering higher education is a good time to discuss “the other side of money” with your adult child. Use the following as a guide:

• During young adulthood and the early career phase, most people focus on earning an income, buying a car, and finding a place to live. The next aim is to buy your own home. This is fine, but without financial discipline and a more nuanced application of the principles I referred to in Parts 1 and 2, it will be difficult to achieve without incurring unwanted debt. To improve your chances of achieving these goals and to stay on track to retire at a predetermined age and live a full, noteworthy life, stick to the following basic principles:

• Before you do anything, as soon as you receive your first pay cheque, protect your income. Don’t worry about life assurance until you have financial dependants. Take out income protection first.

• Pay yourself first. From your first pay cheque, set aside 10% for long-term investing. If you maintain this throughout your working life and do not draw on it, you will retire financially secure. Apply the simple rule to yourself: “My actual income is 90% of what my contracted salary is”.

• Avoid bad debt. Use good debt to your advantage. Gearing can work wonders if used properly when building an investment property portfolio.

• Never consider your primary property or place of residence as part of your investment portfolio.

• Don’t fall into the trap of investing all your spare reserves in your home. Instead, “buy down”.

• Keep an eye on interest rates and understand what drives them. Always assume at least a 3% higher interest rate when assessing affordability.

• Apply the three-jar system (see Part 1) throughout your life. It will serve you well.

• Understand that money has a very strong emotional side. Investment decisions are driven by emotions. Make money decisions unemotionally.

• If it sounds too good, it probably is.

• Don’t fall for schemes. There is no “get-rich-quick” scheme without excessive risk.

• Diversify, diversify, diversify – across countries, currencies, asset classes and assets.

• Build an emergency fund, not just for yourself but also for family members. You never know what curveballs life throws at you or your family. The “sandwich generation” is growing, and it may become the norm for an individual to financially support their children and parents. Siblings are not excluded either.

• Consider that it is likely that, at some point, you may have to rely on frail care services. They are expensive. Plan accordingly.

• Cognitive decline is a reality. Discuss it with your older children. Should a parent develop dementia, how will the family handle it?

• Don’t wait for retirement. Create a bucket list early in life and start crossing off “want-to-dos”. Again, use the three-jar system.

• Don’t rely on inheritance; build your wealth and legacy.

• Determine how much is enough. Money does not make the person, and the constant pursuit of more is often harmful to relationships and health.

I hope the last three articles have helped in some way by providing you with material and ideas to guide your children of all ages towards a more structured and manageable financial life, and that your children (and you) can find a way for money to work for you, rather than for you to work for your money.

I am happy to take this discussion further if you would like more guidance.

Take care and invest wisely.