Personal finance should be a mandatory subject in school – even for foundation phase grades. Without this kind of financial education, many young adults don’t know how to manage their money, apply for credit, and stay out of debt. Teach your children how to manage their money.
Not all debt is bad debt, but it is up to you as a parent to help your child understand debt and how to manage it, whether it is good debt, like paying a bond on a home, or bad debt – a maxed-out credit card. To learn good debt habits, your children need to learn good financial habits.
Here are some of the most important financial habits you can teach your children to manage their money better:
Teach by example
Even adults struggle with managing their finances, so it is very difficult to assume that you can simply teach by example. You can, however, reinforce certain values to help your children build better financial habits, such as being rewarded with pocket money for chores, and saving their money to buy something they want.
Show them how to stay out of debt
The simple rule of debt is to not spend more money than you earn. You can teach your teenagers to do this by using the envelope method: fill envelopes with cash and label them according to your child’s needs, such as entertainment, clothing, or something they are saving towards – whether it be guitar lessons or their Matric Rave holiday. With only cash available in each envelope, they will need to think carefully about what they spend it on – and whether they should or shouldn’t dip into their savings to pay for entertainment – and how much they owe you “on credit”.
Insurance is everything
Many insurers in South Africa (medical aid and others) allow adult dependents, but at around the age of 26 or 27 (when they no longer qualify as a dependent on your scheme), they will need to take out their own insurance – be it on their vehicle, home contents or medical aid. Help them shop around for the best premium and make sure you explain the fine print. For example, show them how to prevent shortfall insurance from coming up short!
Pay themselves first
Some of the best advice you can give your child when they first enter the job market is to pay themselves first. Before they spend a cent on debit orders or monthly necessities, they take a sum of their earnings and put this into an investment account. Whether it’s an emergency fund or they are saving for a deposit on a home, learning to save is critical to healthy financial habits.