We hope to raise our children to be happy and successful in life. While success will be defined differently by everyone, for most success includes some form of financial security and the ability to achieve the goals that are most important to you. The greatest determinant of financial security is knowledge and for children and young adults the majority of their financial knowledge is obtained from from parents and family. Unfortunately for many if not most people their finances are a very intimate topic and one they are not very comfortable discussing.
Hart Wealth Management is committed to improving the financial literacy of the community and has partnered with numerous schools to teach the basics of personal finance. This article hopes to provide you with some ideas about how to start the conversation at home if you haven't before.
Financial Decision Making
Where to begin
To be financially literate you need to be able to make informed judgements and effective decisions regarding the use and management of money. As such we start with a look at the decision making process
The first step, as with all financial planning, is an analysis of goals. Too few people regularly sit down to assess what their main goals and objectives are, however in order to make the decisions that will lead to success, the end result needs to be clearly defined.
With your goals defined you can identify your current position and develop a strategy as well as measures that determine as you progress whether you are on track to achieving that goal.
As personal finance is an abstract concept for most teenagers. When discussing financial goals you can create great context by discussing your goals and then also working with your children to define their own goals trying to think of as many as they can.
We would like to repay our $500,000 mortgage in the next 15 years. This requires us to make monthly mortgage repayments of $3,954
We would like to travel as a family to Europe next year at a cost of $15,000.
We would like to build an investment portfolio to fund our retirement
I would like to buy a guitar and amp for $1,000
I would like to buy a bike which costs $1,500.
I would like to buy a car in 12 months when I am eligible for my provisional license, this would cost $6,000 for what I would like.
When setting goals try to use the SMART format
Specific - Be clear and ask yourself what, why and how
Measurable - Establish criteria for measuring progress towards each goal
Achievable - Make them realistic given your current situation, resources and time available
Relevant - Ensure they match your mission or your ‘bigger’ life objectives
Time bound - Set a timeframe for each goal
Opportunity cost and delayed gratification
If you were to study the personality traits of those that are successful in life, most will likely share one trait, an ability to delay short term gratification for a longer term benefit.
No matter who you are it is impossible to be able to do everything you would like, you may be limited by time or money but in order to do one thing you are going to have to give up something else. The concept of opportunity cost is defined as the best alternative that is given up when making a choice. If we were to look at the goals above and based on a part time job where it would only be possible to save $6,000 in 12 months we are faced with the problem that not all goals are achievable. By choosing one we are forced to give up another (an opportunity cost).
When faced with this conflict it is important to determine priority of goals. It would only take 2-3 months to save for the guitar/bike but by buying the either of them would make the goals to purchase a car when they get their license unfeasible.
For most teenagers the freedom the car provides is going to be more important but it is only going to be achievable by focusing on the bigger objective and delaying gratification to forgo the purchase of the bike/guitar.
People in general have a tendency to focus on the short term and too often this leads to decisions that inhibit our ability to achieve the goals we would have identified as more important. To delay gratification is not easy but it is a habit and skill that can be learned. Fostering this skill creates the foundation for financial success. Where you have worked with your children to define their goals and identified what is most important to them you will have the ability to help them avoid a decision that is contrary to their goals and by doing so reinforce the importance of delayed gratification in achieving their goals.
Budgeting (are your goals achievable)
For nearly everybody the restricting factor on their ability to realise their goals will be cashflow. As such budgeting is a vital skill in maximising your income in achieving your goals.
Budgeting is pretty simple but once again a very abstract concept until you are responsible for it. It can be a quite easy exercise to complete a basic budget of household expenses with your children. This also helps them be aware of the cost of living they are used to which is useful when comparing possible careers and income. If you do not have a budget I have one available for anyone to use: Budget Spreadsheet
For illustrative purposes I have also provided the average budget of a single person household under 35 as a guide of what the costs will be once they leave school and become responsible for themselves.
Personal Financial Position
As well as looking at your goals and your budget it is also really valuable to discuss your current financial position. Using things like Bank Statements you can discuss the current structure of your debt, how mortgages and credit cards work. Looking at your payslips and tax returns you can show how tax is paid and what strategies you have employed to reduce your tax bill. Your most recent superannuation statements show what your employer has contributed, what you chose to contribute & how it is invested. For most people their super will also house some form of life insurance and income protection. How much cover do you have and why you chose that amount. Finally discussing wills and powers of attorney and how this will ensure they are protected should anything happen to you.
Children look at their parents when developing money habits, an open conversation will foster good habits. By explaining how these things work as well as talking about any mistakes you may have made will expand their knowledge and improve their understanding of personal finance so when they become responsible for themselves they will have the knowledge to make the financial decisions that will lead to their success.
At Hart Wealth Management we strongly believe that a good grounding in the core concepts of financial literacy should be part of every child’s education and to assist you in discussing this at home I have made the full course content that is presented in our course. Another useful resource is the Money Smart financial calculators that can be very useful when discussing these concepts.
Also If you have any questions about your own finances or have never met with a financial planner and are interested in how we may be able to benefit you please contact Hart Wealth Management for a personalised conversation.