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Time, the old saying goes, is money. Time is also the one commodity that our children have in abundance. With their whole lives ahead of them, they have ample time to build up savings and set themselves up for life. What they don’t have is the knowledge of how to save, so one of the best things we can do for our children is to help instil in them the habits that will stand them in good stead for the rest of their lives.
As someone who is both a parent and who has a career in the savings industry, René Grobler, Head of Investec Cash Investments, makes sure that her children are as savings-conscious as they can be. On this Investec Focus Radio podcast, she shared some of her ideas with us.
Listen to the podcast
Understanding the purpose of money – “Why do I like money?”
It’s important, says Grobler, to have a conversation with your children about the purpose of money, namely to spend it on things. But the conversation should also be about the value of money, about spending it wisely and understanding the difference between instant and delayed gratification, or the idea of paying yourself first (saving) vs paying others (spending).
“[It’s about] people and kids especially, understanding that, even if I don't get the satisfaction now, I'm paying myself first,” she says.
The time value of money
As adults, we understand that inflation can eat away at the value of our money. On the other hand, we can grow our money over time if we allow what Grobler calls the “magic of compounding” to take effect. This is an important lesson to teach children about compounding and interest, and there’s no better way to teach it than through opening an interest-bearing savings account and letting your child see how their money grows.
“So if a child had R100 pocket money that they put away at the end of the month and they left it in the bank at a 7% interest rate at the end of the year, they would have R107 in their bank account. So if you then have R107 at the end of the year and you earn another 7% on top of that, the interest you earn in the second year will be higher than the interest in the first year,” says Grobler.
It’s about people and kids especially, understanding that, even if I don't get the satisfaction now, I'm paying myself first.”
The rule of 72
One way to keep kids motivated to stay the course (especially if they are a little mathematically oriented) is to teach them about the “rule of 72”. Grobler explains that this is a simple rule of thumb that tells you how many years it will take to double your money if you leave it to earn interest at a certain interest rate. “So the way it works is you divide 72 by the interest rate you are earning. So 72 divided by the 7 we were talking about earlier gets you about 10. At 7% interest, it will take the child 10 years to turn the R100 into R200.”
How do you ensure your child saves as much as possible?
So your child understands the principles of saving and the magic of compounding. The next trick is to ensure they try to save as much as possible and not be tempted to see saving as less important than spending.
Grobler says people are often tempted to save what's left over in their account after they’ve spent it.
“So one of the things you can do, as an adult and also as a child from a discipline point of view, is to give yourself a number, whether it's a percentage or whether it's an actual physical number that you organize, to save every month regardless,” says Grobler.
“And the way to look at it is not as a grudge saving, but rather you’re saying, ‘I'm paying myself. This is for my future.”
Introduce your child to the world of banking
Investec Private Bank Account clients can open an Investec Youth Account for children (under the age of 25) for no additional monthly fee.
Being responsible about money – and creative
Your children aren’t typically earning a salary and so are reliant on you for income, through an allowance or pocket money. That doesn’t mean they shouldn’t be responsible about it and know what things cost.
“When you give your children pocket money, it's important to tell them what they are responsible for,” says Grobler.
But that doesn’t mean you can’t talk to them about ways to make money, for example by taking things they have made or bought and selling them to their friends, for example. “Let the kids come up with ideas, open up the conversation,” says Grobler. “Money should not be a taboo subject.”
Don’t forget to diversify
Finally, Grobler says you shouldn’t forget the principles of diversification when saving for the future. “Look at the different products abs funds that are available, to ensure you don’t have all your eggs in one basket,” she says.