Future-proofing your kids: Financial lessons on interest, debt, budgeting
By Tom Brukman, Financial Planning Specialist and Director of Chartered Wealth Solutions, Western Cape
Raising financially responsible children in today’s fast-paced world is crucial for their future stability and well-being. With the allure of instant gratification through technology, children are often exposed to spending without understanding the value of money. Starting financial education early can set them up for a lifetime of smart money management. In South Africa, where economic challenges are prevalent, teaching financial literacy to the next generation is vital. But at what age should you start, and how do you introduce complex topics like credit scores, interest rates and debt? Here are some practical steps for raising financially responsible children.
Start early with basic money concepts
Children as young as five or six can start learning the basics of money. Introduce them to the value of different coins and notes by letting them handle small amounts of cash. You can give them a weekly allowance, encouraging them to make decisions about how to spend it. By using a small allowance, children can experience the consequences of overspending and learn to make more thoughtful decisions.
Involve your child in small household decisions. For instance, when grocery shopping, explain why you choose certain brands or why buying in bulk can save money. This instils a mindset of value-driven purchasing early on.
Introduce savings with a goal in mind
The idea of saving is another foundational concept. Encourage children to set savings goals, such as saving for a toy or game.
A great tool for teaching savings is the “three-jar method”: one jar for spending, one for saving and one for giving. This teaches them the importance of allocating money towards different purposes, such as immediate needs, future purchases and charitable giving. Over time, children will learn the benefits of delaying gratification and saving for future needs.
Gradually introduce more complex financial concepts
As your child enters their teenage years, they’re ready to handle more complex financial ideas, like budgeting, managing debit and credit cards, and understanding loans. One critical lesson is explaining what a credit score is and why it matters. A credit score reflects how responsibly someone manages credit, and it plays a significant role in their ability to borrow money, rent a home or even secure jobs in the future.
You can explain how a credit score is influenced by factors like making payments on time, keeping balances low on credit cards, and limiting new credit applications. Although South African teenagers aren’t likely to have credit cards, they can learn by observing how you manage your credit and by understanding the consequences of late payments.
Teaching interest rates and compound interest
Interest rates can be a tricky concept, but you can teach it with practical examples. Start by explaining that interest is either the cost of borrowing money or the reward for saving it. For instance, if they borrow R100, and the interest rate is 10% annually, they will owe R110 at the end of the year. Similarly, if they save R100, they will have R110 after a year.
To help them understand compound interest, use a real-life savings example. If they save R500 in a bank account offering 5% annual compound interest, show how their money grows over time. In the first year, they will have R525. In the second year, the 5% interest will be applied to R525, giving them R551.25, and so on. This practical demonstration can make the concept clear and engaging.
Use online tools and games
Online tools like compound interest calculators can make learning about interest more interactive. These calculators allow you to input different amounts, interest rates and timeframes to see how money grows or how debt accumulates. For example, they can experiment with how saving for five years versus 10 years affects their savings, helping them grasp the importance of early saving.
Games such as Monopoly can be tweaked to simulate interest, showing how debt grows if not paid off quickly. Additionally, financial literacy apps offer engaging, game-based lessons that make learning about money fun.
Real-life applications: Budgeting and debt management
Help your teen create a realistic budget for essential expenses like clothes, toiletries and leisure activities. This teaches them the importance of living within their means and planning for unexpected costs. Budgeting apps like YNAB (You Need a Budget) or 22seven are great tools to track spending and visualise how small expenses add up over time.
Introduce the concept of different types of loans – student loans, personal loans and home loans – and explain how repayment terms, interest rates and the length of the loan affect the total amount paid. Teach them the difference between "good debt", like education loans, and "bad debt", like high-interest credit card debt, to help them make smart borrowing decisions.
The importance of an emergency fund
An essential lesson is explaining why it’s important to save for unforeseen circumstances. Teach your child to set aside a portion of their income for emergencies like medical expenses, car repairs or replacing a broken phone. Having an emergency fund can help avoid falling into debt when unexpected costs arise.
Investing basics
Even though investing can seem complex, it’s never too early to introduce teens to basic concepts like stocks, bonds and mutual funds. Explain how investments grow over time and why investing early can help them build long-term wealth. Understanding the basics of investing prepares them to make informed decisions when they start earning their own money.
Teaching financial responsibility to children and teens is an ongoing process that requires patience, practical examples and real-life applications. Starting with basic money concepts and gradually introducing more complex ideas can help set your children on a path to financial success. With the right knowledge, they’ll be well-equipped to handle the financial challenges that lie ahead in South Africa’s economic landscape. For more information, visit www.charteredwealth.co.za.