The life-changing money chat to have with your kids

I was asked a bunch of two-option questions in a podcast last week, including if I was a saver or a spender. “Saver,” I swiftly answered.

But if my children were asked, their accurate responses would be respectively “saver” and “spender”. Yep, I have one of each. As any parent knows, kids arrive hardwired for both a certain level of consumption and a particular ability to delay it.

Kids often come hardwired with a certain ability to save and to spend.Credit: Dionne Gain

But here’s the thing: if you can get them to understand and appreciate the value of compounding their cash, you’ll see their consumption go down, and their determination up. This is your script: “I know you want that [insert name of shiny/distracting consumable]. But did you know you could instead get free money?” Then, following the disinterested/disbelieving response:

“Well, you know that to get what you want, you need to save a little bit each week? Here’s the money magic: when you stash your cash, you make money on money you haven’t even saved.”

Which is when they’ll get super sceptical (a concept they should hang on to because it, too, is conducive to financial success). So go on:

Time is the most valuable commodity you can have because time turns into money if you simply start saving and investing early.

“Money in the bank or in investments earns you a return … and the beautiful part is that from the day you start saving, you begin earning returns on returns. So, if you save $100 and get an 8 per cent return, after a year it will be boosted to $108.

“Even if you don’t save another dollar, the next year you don’t get $8 extra, but $8.64. The year after that, $9.33. The year after that, $10.07. Up and up; bigger and bigger. It’s the snowball of success … and the secret to money.”

Your kids should be sitting bolt upright by now. But to clinch it, utter these words: “If you save $6 a day from when you get your first job at 15, and earn 8 per cent on it, by age 60 you will be a millionaire. And of that $1 million, you will have saved only about $100,000 yourself. The remaining $900,000 is free.”

Now, this conversation – and the powerful numbers in it – perfectly conveys compounding, a concept Albert Einstein is said to have nominated as the Eighth Wonder of the World.

Understanding how it increases their savings really will change a young person’s life. So, too, will understanding how to plan for the future, working and earning, budgeting and managing household finances, investing and starting a business.

These and other key money skills and principles ought to be taught in schools, according to the students recently surveyed by the Ecstra Foundation, one of the not-for-profit organisations that has stepped up to fill the void left by the (rightful) banning of school banking and branded financial education in schools.

Though there is a smattering of money smarts – known officially as financial capability – scattered across the Australian curriculum, it is the most vital thing that receives the least educative attention.

In Australia, Ecstra’s survey also suggests receiving money smarts lessons at home is important, but 24 per cent of parents admitted to personal knowledge gaps and 16 per cent said they are not sure what to teach or talk about.

And here’s the thing, on that same podcast the other day, I was asked another one-or-the-other, make-or-break question: “Time or money?” And my response was again fast: time, because it’s another iteration of compounding.

Time is actually the most valuable commodity you can have because time turns into money if you simply start saving and investing early. And time’s on your children’s side.

What does it take to reach that amazing million-dollar milestone by 60 if you don’t start until 10 years out? A massive $179 a day. And you have to save $656,000 of it yourself. So maybe start by telling your kids that.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter, and Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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