'Are we rich or poor?' How to answer your kids' money questions
In 2018, the Financial Planning Association of Australia (FPA) published research about raising children in the "invisible-money generation" where cashless transactions are commonplace.
From several prior studies and personal experiences, we already knew adults find it hard to talk to each other about money. It came as no surprise, then, that almost seven in 10 parents surveyed didn't know when or how to talk to their kids about money, especially in a digitally led world.
That same year the FPA published a helpful ebook about how to talk money with children (it's still available online). Among all its tips the ebook says that between the ages of three and five, children can begin to learn what money is for, where it comes from and why we need it.
The message is that it's best to introduce money, or at least the concept of money, to children as early as possible. This way it makes conversations about money much easier as kids grow, become more inquisitive and go on to ask you some tricky questions.
Better now than never
Heinrich Jacobs, managing director and financial adviser at Lightbulb Wealth Management, says these early conversations help normalise money, spending and value. "It's never too late to start, but as kids get older you'll need to explore more complex concepts like the value of money and quality over quantity," he says.
He says younger children won't necessarily understand the value of customer service, but they certainly understand what a product is and how to get one. Research shows that during their adolescent years, children are exposed to more than 10,000 marketing and selling messages. With this in mind, it's a good idea to make sure your money messages are relevant by modifying them to suit your child's age, says Jacobs.
His eldest daughter turns five later this year and she already knows that if she wants a doll it doesn't arrive on demand. Her parents have to work for money and then use some of that money to buy the doll.
"And I'm not going out and buying 20 dolls. It's maybe one or two dolls," says Jacobs.
Just as important as having the early conversations is leading by example. Kids are watching all the time so you've got to be a good financial role model.
"If being open about money is the norm, then when things get tight it's not such a shock to the kids when there's a budget and you have to say 'we can't afford it'," says Jacobs.
He says if this isn't the norm, explain your situation and don't hide it. "You'll be struck by how well they [kids] absorb the lessons that you're teaching them."
Concept of a trade-off
Australian Bureau of Statistics (ABS) data of spending during the coronavirus pandemic, and the subsequent economic recession, suggest there have been significant cuts to household budgets. It's likely to have created some difficult family discussions, especially if incomes have been lost.
Kate McCallum, director and financial adviser at Multiforte Financial Services, says it's critical to make sure you're clear on what you can and can't afford to spend so that you can also communicate this to your kids effectively. And you don't have to keep using the line "we can't afford it".
During a challenging time in the early days of starting her financial advice business, McCallum says too often she caught herself using the "we can't afford it" line in front of her two sons (now in their 20s).
She didn't want her sons having a "can't afford it" mindset later in life - to set a financial benchmark of being poor. Instead, she changed the conversation to say it wasn't in the family's budget or plan.
Then there were the trade-offs. If her sons wanted a particular toy, for example, McCallum would let them know that something else had to make way in the budget, meaning something the family might like to buy or do couldn't be done any more.
And just because something costs more doesn't mean the child places a greater value on it.
"Just because adults assign a big value to being able to go out to dinner or on an overseas holiday, it doesn't mean kids necessarily assign the same value to it," she says. "When cash flow is a bit tight, we need to forget about the dollar value assigned to an item and start thinking about what things we really value as a family so that we still get the end result at a much lower cost."
The tricky questions
Are we rich or poor? How much money do you make? Why don't you have a job that earns more money? How come we don't live in a bigger home? Why don't we go to private school? Can you lend me some money?
This is just a small selection of questions from kids that could prove difficult to answer.
Kate McCallum says parents first need to discuss what information they are prepared to disclose to their children.
You can't expect children to have the same filters as you do, so there's a risk that kids will get it wrong if they decide to share the information with others. Make sure you're comfortable with what you discuss.
McCallum says one way to be more open about money is to discuss larger transactions such as buying a car. In her family cars were always bought second-hand.
"We would discuss the process [with our kids]. We would discuss what our price range was for purchasing a car, and then we would talk about how we're going to handle the negotiation," says McCallum.
She says she also found it useful to talk to her sons about how to deal with utility providers. She'd let them watch her handle the phone call when she might be asking for a discount, for example. This way they're seeing "more real-life transactions happen".
It's important that children know money isn't an infinite resource and the Bank of Mum and Dad isn't a bottomless pool of cash.
Heinrich Jacobs says there's nothing wrong with kids learning there's a limit to what you can afford. "Money just doesn't come out of an ATM. You have to go and work hard for it."
Don't ignore "the bad stuff"
There are families who, for various reasons, don't talk about money, but Jacobs says what he most often sees are families who don't talk about the negative aspects of money, such as debt, loans and even fines.
He encourages these families to be more open about "the bad stuff". Jacobs says that if you're finding it difficult to explain a money issue, especially during the pandemic, it's okay to point out that it's a universal issue and not just one your family is facing.
He says that for older children, the tap-and-go world they're living in does make it harder to create discipline around money. But the rules generally remain the same whether it's cash or card.
One example is pocket money. If your child has a savings account into which pocket money is largely deposited, and they're deciding to spend it all every week, that will soon cause some pain.
"If you do the chores to buy lollies, and you spend it all on Monday and Tuesday, you've got nothing for the rest of the week. That causes some pain. Mum and Dad aren't giving you any more money so you've got to learn these lessons," says Jacobs. "It's not too dissimilar to how an adult might live pay cheque to pay cheque."
McCallum says instead of money boxes, you can set up pocket money savings/transaction accounts in a spreadsheet or a list on the fridge, showing children where their savings are up to.
In her experience, the adults (and kids) who are the best money managers are those whose money is integrated into their daily decision making. "That's our objective when it comes to kids and money. It's to integrate money conversations into day-to-day decisions," she says.