How to explain wealth management to children

Explaining to children how wealth management and the financial world works helps them to be more independent and prepares them for adult life. Find out how.

Just by uttering the term financial literacy around children is guaranteed to dramatically reduce their attention span. Talking to children about money and wealth management requires a certain amount of tact, patience and determination. But the effort is worthwhile, as children who come into contact with the topic at an early age develop a more rigorous sense of the value of money, and recognise the importance of saving and managing wealth.

Find out how to explain wealth management to your children.

Start with values

A money talk with your children should include the family view of good wealth management practices. Explain that saving is important to you because, for example, it helped you pay for your studies or buy a house. For parents who strive to grow their wealth, it is important that they pass on these values to their children. Even if a child is not ready for facts and figures, they can understand the decisions their parents make and the impact they have.

Use real examples

Consider showing your children one of your monthly bills—the electricity or TV bill, for example—and explain where the costs come from. Discuss together ways to reduce the bill, for example, by turning off the lights when you leave a room or by cancelling a premium channel the family rarely watches. Review the next monthly bill with your children to see how your family's choices have helped cut expenses. You can make it a game to see how much they can save as a team, with a reward at the end.

Seize everyday opportunities

Everyday life offers numerous opportunities to explain wealth management to children in a practical way. It is important to take advantage of these learning moments and introduce some lessons about money into everyday life.

For example, buying a car can be a learning experience. Letting children be included in this process, by explaining to them the various payment options available, helps them understand how financing and bank loans work. This is something that may take longer to assimilate if it is not understood in a practical way.

Many children spend their childhoods thinking that buying something happens as if by magic. They order something over the internet and the shopping magically appears at home. That's why it is important to use everyday moments to learn, like when you take your children with you to the supermarket or when you are paying the bills at home. Explain what you are doing. Even if you feel your child doesn't fully understand, engaging them in these conversations and basic money situations can have a positive impact.

There’s more to it than pocket money

The allocation of an allowance is one of the more traditional methods for teaching children some of the basics of wealth management. It is a step in the right direction, but it has several disadvantages, particularly because it places too much emphasis on managing expenditure; the child has a certain amount of money to spend and must manage it. This is an important lesson, but it does not show how that money is earned or how to generate profit from savings, two fundamental lessons for adult life.

In addition to pocket money, ask children to make a simple budget to show how they will spend it. And provide opportunities for your children to earn some extra money. Encourage them to work so they understand that it takes effort to create wealth. From an early age, offer payment for "extra" work around the house and yard. For teenagers, encourage them to take holiday jobs.

Also try to explain how to invest your savings with a simple and fun game that serves as a first contact with the financial world. For example, leave it up to the child to choose a part of their pocket money to invest in different assets (shares, bonds, funds) and set an attractive goal – to buy a toy, for example.  Then, get them to keep track of the amount invested until they reach their goal. Once the first goal is achieved, set another more ambitious one, and so on.

Talk about money as a family

 Many families choose to shield their children from conversations about money. Reasons for this strategy range from parents experiencing a lack of ease with the subject to the fact that they know the child will not fully understand.

 However, there are several studies that show the importance of doing so. Talking about money as a family can reduce the negativity that usually surrounds finances. After all, money is constantly cited as the main stressor in an adult's life. Talking about it as a family can make it less intimidating.

Teach the importance of delayed gratification 

It may seem like a complex concept to teach a child, but according to experts, it is one of the most important messages to pass on.

Delayed gratification inculcates the virtue of patience and the value of waiting. We wait for our birthday and the holidays, so we also need to learn to wait and save for what we want. Pointing out that we have to wait is a great way to teach them to build something important; how to save, with the thought of a later reward. Simple lessons like not buying things you don't need so that you can save for something you really want are important.

Set an example

Children look to their parents for an example of behaviour - and money management is no exception. Teaching children good financial habits is partly about setting an example. Share with the child the expectations and norms around money in the family, with easy-to-follow examples. Teach children to fix things when they break instead of throwing them away. Do a budget before you go shopping, and stick to it.

When parents demonstrate good behaviour from the start, and lead by example, children understand that asset management is part of growing up.

Share your personal journey

 Many children learn best from personal stories, especially when they come from their parents. It is these experiences, when repeated over a number of years, that leave an indelible mark. Explain to your children key financial milestones in your life, the reasons for each choice, the good results and the mistakes you have made. Do so openly and honestly. And, aside from your own story, you can also pass on stories from previous generations.

 A child who buys a toy that he has saved up for will never forget the effort it took to get it. A child who grows up with a father who is always away at work is more likely to associate money with the absence of love.

 Our children learn from us, whether we like it or not and whether we actively teach them or not. Sometimes the lessons are direct instructions; in other cases they are silent behaviours. But when parents don't explain to their children how money and wealth management works, children are forced to create their own interpretations, and it can take years to correct ill-conceived perceptions, if they can be corrected at all.

 Financial literacy might not be the most fun topic to tackle with children. But in a changing world, with temptations of easy money at every click on the internet and the radical transformations in employment now taking place, it could make all the difference to their future.

Click here for additional Legal Information.