Ho to teach children about money

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Children these days seem to expect – and receive – far more financial support than they got a generation or two ago. Should they be getting such an easy ride? Julianne Dowling asks the experts.

It’s that wonderful moment you’ve been waiting for for years: your youngest child’s university graduation ceremony. What a day! You’re happy, you’re proud, but – and let’s be honest here – you’re mostly relieved because you can see financial freedom ahead. The last of your dependents is about to be sent on their way and you can enjoy your own hard-earned money now. Right? Not necessarily.

These days, parents are expected to help their children as much as possible. You may have clothed, fed and educated your kids for the last 20-something years, but now they say they need more of your money to make it in the big wide world. Money for a car, money to start up a business, money for a deposit on a house… Where does the financial relationship begin and end? And what do the experts suggest before taking on extra debt for your kids?

Big spenders

Traditional post high school children’s expenses are tertiary education and car financing. Now parents are also helping their children to buy property and finance major expenses, such as weddings or overseas trips. Bailing children out of debt is also commonplace, with the clearance of Higher Education Contribution Scheme (HECS) debts being the most obvious example. The cost of mobile phones, easy access to credit cards and the normalisation of personal debt through HECS has created a disturbingly similar Australian dynamic to trends in the UK and US, where a large number of teenagers fall into credit traps.

Parents who are asset-rich but cash-poor often raise funds to help their children by taking out a second mortgage. A growing trend is reverse mortgaging, where borrowers over the age of 60 take out a loan on a percentage of the value of their home. The underpinning idea of these schemes is for retirees to be able to spend more on themselves while they can still enjoy life, but that money is increasingly being spent on their children.

Parents often agree to act as a guarantor for their children’s loans, but it’s important to carefully examine the potential repercussions of that action. “Becoming a guarantor for your child’s loan is a choice, but as a parent you should be clear on what they’re doing and the implication of a default,” says Sally Manion, director and national head of ipac Financial Planning. “In the event that the loan can’t be met, the sale of the parents’ home may be involved. Parents need to fully understand the risks, as well as the complications of divorce if their children are married. Acting as guarantor is not something we condone as advisers but if clients are resolute we say, ‘By all means do it, but talk to a solicitor as well’.”

The generation gap

Pre-1980s, life was about having a job for life and money was a conversational taboo. Not any more. Virginia Dowd is the founder and managing director of financial coaching and advice group Money Solutions. She believes the change in the child-parent financial relationship hinges on the generations’ differing values. Baby boomers’ values are different to their children’s because everything that baby boomers and their parents knew has been turned on its head. “For the older group, the need to pay cash for everything and have no debts are fundamental beliefs. They were taught that money doesn’t grow on trees. The mixed messages come with the next generation’s willingness to borrow to achieve their goals,” Virginia reflects.

Lessons to be learned

Virginia believes it’s important to instil financial skills and good money practices in your children early on, in order to build successful long-term financial relationships. “The challenge is to help move your children to self-reliance rather than dependency,” she says. “Unfortunately, if we haven’t had the right role modelling, it makes it harder to teach our kids about money literacy.”

Laura Menschik, managing director of WLM Financial Services, agrees. “I’ve seen parents allow unrestricted use of credit cards and the children abuse the privilege,” she says. “I think it’s up to parents to set the parameters. If a parent takes on total responsibility for their child’s debt management, the child may not learn anything.”

Virginia uses depreciating car value as a simple example of the lessons that need to be taught: “Mostly, kids want to buy a car. They see no risk in borrowing between $20,000 and $30,000, yet that car will go down in value as soon as it’s driven out of the yard, not to mention the costs of maintenance.” Far better to buy a cheaper car and use the balance of the original amount to invest in things like managed funds and property, where your investment is more likely to grow in value.

Virginia believes there are a number of practices that parents should try to adopt themselves, in order to set a good example for their children:

• Set financial goals. You need to help kids to understand the value of setting long-term lifestyle and financial goals. How much do you want to have saved by the time you stop work? How do you set that goal? What are the steps to take? What do you need to understand? Get children to set goals with their pocket money for something they want in six months or a year’s time.
• Be proactive. You don’t necessarily need a lot of money to achieve your goals – teach your children how to apply that principle and the value of time. Use this example: if you put away $100 a month – and how many coffees is that? – after 15 years, it will be worth $26,000, based on five per cent interest per annum.
• Know where your money is going. A good habit is to spend only 80 per cent of what you earn and call it a ‘priority spending’ plan. Instead of feeling bad about what you’re not doing, feel good about taking control of your finances.
• Be involved with your money. Read and understand superannuation and bank statements. Ask questions. Understand fees and charges. Be aware of what working and lazy assets are, and how the former can grow in value rather than borrowing for assets that will drop in value.

With a bit of planning and clear thinking, it is possible to look after your children while at the same time teaching them the benefits of financial independence.