Peter Vickers, Chartered Accountant, Lindfield
It’s never too soon to start saving and in many cases even if you double your deposits at a later date you may never catch up to people who start saving earlier. An understanding of compound interest can encourage young people to start saving now! But good saving and spending habits don’t have to be introduced when the child is old enough to understand compound interest. You can start around the time they start school.
Pocket money: children around six or seven can be encouraged to spend a little of their pocket money now and save the rest for something they really want, discouraging instant gratification and enabling them to experience that rewarding feeling when you purchase something you’ve been longing for. It’s important that the award is achievable to encourage the saving behaviour and the benefits of the lollies vs toys be felt!
Allowances and earnings: some families introduce allowances for their children for helping with household chores, which makes them feel as if they are contributing to family life. It also gives you the opportunity to start talking about saving and investing. Kids can be encouraged to save say ten or 20 per cent and then choose to spend or save the rest. You could also double the amount they choose to save, to incentivise them to save a larger portion.
Saving also gives an opportunity to learn about investment and shares as well as the rules attached to borrowing money. 11-16 years is the time when economic understanding and activity increases.
Introduce investing concepts and the power of compound interest: as your child begins to earn more money, with a part-time job or baby-sitting and lawn mowing, it’s a good time to introduce them to a bank! This presents a good opportunity to shop around and look at where the best savings rates are, again re-enforcing the concept of compound interest. A savings account is more formal and encourages good money management practices. When money is given as a gift for birthdays or special occasions, some of it can be saved for more expensive items or something that they may want in the future. They quickly understand compound interest and how powerful it can be.
Introduce the concept of investing by encouraging them to choose a company that owns a brand they’re interested in…it may be sports related, a games manufacturer or owner of high fashion labels, then look at that company’s performance over a few months and consider the reasons why there may have been growth, a fall or fluctuations in the share price.
Role Models: adults in the house need to set a good example as children emulate behaviour and your attitudes towards saving and spending are likely to become theirs!
Good savings habits pay good dividends for a lifetime. Don’t let your children become adults who wish they’d started saving sooner.
ASIC’s compound interest calculator is an easy tool to help explain the compounding effect of interest to your teens.