The concept of ‘living within your means’ used to be a simple way of life.
In years gone past, credit cards and personal loans were much more difficult to obtain, so there was really no other option.
Today, however, we live in a society that offers easy access to unsecured credit.
With the average Australian credit card debt hovering around $4,000, it’s obvious that many people don’t have clear and effective rules around budgeting, saving and spending.
It’s not just credit cards that are getting out of hand, either: store cards, personal loans, even loans to cover a trip to the dentist are readily available.
This easy access to credit has significantly blurred the lines of money management for modern households
Developing strong financial ‘common sense’ is essential for everyone, but particularly for property investors, and passing this on to your children truly is the gift that keeps on giving
I don’t know about you, but there are dozens of life lessons I wish I’d learnt earlier, and plenty of them revolve around money.
And if I had a dollar for every time an investor told me, “I wish I’d started buying property sooner…” I’d have another property deposit ready to go!
There are several money lessons that I believe parents should share with their children, but the top ones in my view are:
Money Lesson #1: Know your personal budget
To get ahead financially, you need to know exactly how much you earn and how much you spend – on everything from bills to takeaway meals – without relying on credit to manage your cash flow month-to-month.
The only way achieve this is with a clear, simple budget.
It doesn’t need to be too detailed, but it does need to give you an overall picture of how much is coming in, how much needs to go out to survive, and how much is leftover afterwards.
But how do you involve your children and teach them this valuable money lesson?
It can start before they’re even earning any pocket money of their own.
Children as young as four and five can understand concepts of earning money and exchanging it for goods
Once they’re old enough to earn a few bucks for washing the car and bathing the dog, you can then start teaching them the art of saving for ‘big ticket items’.
Money Lesson #2: Spend less than you earn
Spending less than you earn is a simple yet crucial step towards reclaiming financial control.
However, because some people (perhaps most people?) don’t have a genuine understanding of their income and outgoings, this can be an impossible task to accomplish.
It’s like asking someone to travel no more than 20km between point A and B, when they don’t have any idea whether either location is.
In simple terms, if your family income is $100,000 per year after tax, you should try to make sure you only spend $90,000.
The difference of $10,000 can then be used to pay off bad debts (such as credit cards) in the first instance, before being set aside to invest in your financial future
This lesson is all about empowerment, so be sure to celebrate your financial wins with your kids.
Show them your credit card statement that shows a zero balance, or have fish and chips on the beach to mark your final car payment.
The aim is to ensure they know the value of earning more than you spend.
Money Lesson #3: Develop strong savings habits
We all want the best for our children, which is why a common trap for parents is giving their kids everything they feel they missed out on growing up.
Trampoline in the backyard?
Brand new clothes and shoes each season?
Entitled, impatient attitude geared towards instant gratification?
It may make you feel good to give your child all the toys and gadgets they desire, but in doing so you’re not doing them any favours.
The lesson you want to demonstrate is not one of instant gratification, but one that shows how much reward comes from putting in incremental amounts of effort.
If your child patiently saves $2 per week for a few months to buy a $20 toy, how much do think they’re going to love their new prize?
And more importantly, when lessons like this are learnt young, will it encourage them to manage their money more smartly as they get older?
Money Lesson #4: Invest in appreciating assets
One of the most important lessons I believe you can teach your children is the difference between ‘good debt’ and ‘bad debt’.
In very simple terms, bad debt applies to any purchase that depreciates in value. A car, a handbag, a boat, a new iPhone: all great examples of items that begin losing value the moment they’re in your position.
Good debts, on the other hand, are investments that are likely to increase your net worth, such as property, shares and term deposits.
That’s not to say that you should never buy a car or a boat – my suggestion is simply that when you do, you should be aiming to pay cash, rather than paying interest on an item that is quickly depreciating in value.
Money Lesson #5: Become financially fluent
It boggles my mind that our education system supports teaching maths, economics, business studies and accounting – but the idea of personal finances?
Nothing to see (or learn) here!
As adults, we can all agree that we have some past financial regrets or missteps and unfortunately, there’s a really good reason for that: most of us were never taught how to manage money.
Just one generation ago, people were much more reticent about discussing money, particularly when it came to sharing financial mistakes.
The ‘head in the sand’ approach was much more acceptable to the point where almost all money conversations were traditionally off limits.
The times are (thankfully) changing and now, families are beginning to appreciate the importance of being open and honest about money management.
One of the most important life tools you can equip your children with is an understanding of how the world of finance really works – from interest rates and credit card debts, to tax and budgeting, and everything in between.
Money Lesson #6: Surround yourself with smarter people
If you’re the smartest person in your team, you’re in trouble.
The most successful people in the world know this, so it’s an important lesson to share with your tiny protégés.
Surrounding yourself with good people is essential if you want to get ahead in any area, because successful people lift you up to their level.
They inspire and motivate, and lead by example. Better yet, they encourage you to explore ideas and situations that you may not normally pursue on your own.
Of course, your child’s first experience of someone they look up to will be you!
So the best way to educate your kids on all things money and finance is to ensure you do a great job of educating yourself.
Money Lesson #7: Get a mentor
In so many areas of life, we teach our children to look towards more accomplished and experienced people for guidance.
From their very early days spent at day care and pre-school, through to their schooling years, their involvement in sports, and even tutoring with their school work, they are taught that in order to learn new skills, they need to seek help and support.
Why should it be any different when it comes to money?
Mentors have been helping everyday people become more successful in various facets of life for centuries.
A mentor is essentially someone who inspires you, who has achieved what you want to achieve and importantly, who has kept it for a long time.
So whether you want to become a pro-level tennis player, learn to speak Spanish or master property investor, it makes sense to turn to an expert for formal advice.
Now, whilst I advocate for surrounding yourself with smarter people, including mentors, it comes with this strict caveat: you must qualify your experts.
There are far too many sharks and spruikers out there who are angling to make a quick buck, so be sure to interview any mentor you decide to add to your team.
Money Lesson #8: Organise your paper trail
Successful people share many traits, including drive, determination, resilience and a positive, can-do attitude.
But do you want to know one trait that often goes over-looked?
Simple: it’s being organised!
If you’ve ever asked a successful business person to retrieve an important document, recite an important figure or share details of an important deal, they won’t be scrounging around a desk littered in paperwork trying to find the information.
Instead, they are usually carefully organised with established systems, procedures and support networks in place to ensure they never miss a beat.
Teaching your children to be organised will pay dividends in so many areas of their life.
When they’re older and doing grown up things, like filing their taxes or applying for a loan, they’re be grateful that you taught them to maintain a tidy paper trail.
And in the meantime, having kids who know how to keep their homework organised and tidy up after themselves can’t hurt, can it?
There are plenty of other money messages you may want to share with your kids, but these lessons offer a good grounding in financial literacy and independence.
It’s never too early to start teaching your children how money works – and of course, showing them how it’s down is always far more powerful than simply telling them.
Also published on Medium.