Why parents should teach children the value of saving money

Saving is a skill that should be taught at a young age, according to René Grobler, head of Investec Cash Investments, and Brod Von Brughan and Associates CC, principal and insurance broker Brodwyn Von Brughan.

They shared tips on how to help children develop good financial habits and become lifelong savers.

Fostering healthy ‘money relationship’

“It’s important to have a conversation with your children about money,” says Grobler.

This includes concepts like the value of money, spending wisely, and understanding the difference between instant and delayed gratification.

“Making these discussions relatable and practical, using everyday examples will help kids understand these concepts better. Parents shouldn’t shy away from having these conversations from an early age with their children, adapting the conversation to be age-appropriate.”

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Von Brughan said most times parents shield their children from the household’s financial affairs in order to give them a cosy and comfortable life.

While this is ideal, Brughan emphasised the importance of including kids in family budgeting to show them responsibility in real time.

“If parents have a good relationship with money, and they approach life with optimism and hope, then the kids will see life the same way,” he added.

Grobler added that an important part of saving that people must understand is that, “even if I don’t get the satisfaction now, I’m paying myself first and making sure I can spend in the future”.

Brughan said it was important to teach kids budgeting from an early age.

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The time value of money

Grobler advised parents to open interest-bearing savings account for children to see how their money grows.

He said this could help them grasp the concept of how inflation can depreciate the value of money and conversely how compound interest can increase it.

Grobler made the example that “if a child has R100 pocket money that they put away at the end of the month, and just left it in the bank at a 7% interest rate, then at the end of the year, they will have R107 in their bank account. But, if you then have R107 at the end of the year and you earn another 7% on top of that the following year, the interest you earn in the second year will be higher than the interest in the first year”.

“And so, you start compounding interest on interest, and that’s where the real magic of compounding interest starts to happen. Connecting these examples to savings goals helps to make this practical for kids. For example, your child might be saving up for a new pair of sneakers, a PlayStation or a special trip. Discussing how much savings they have and still need in order to reach their goals helps make it real for kids and gives them motivation to save,” Grobler explained.

Brughan stressed that teaching the time value of money is not a walk in the park. “You can’t really teach that in a hurry, it’s something they will observe over the years,” he said.

Making his own example Brughan drew a mind picture where he reiterated the importance of the time value of money.

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“Two people exactly the same age and one starts investing R1 000 a month from the age of 20 till they turn 30. On their 30th birthday they start contributing their R1 000/pm to an investment. The twin who did not invest from their 20s, when they turn 30 starts putting a R1 000 away into their investments. The twin keeps investing till 60. When you look at the projection of growth, the one that starts at 30 never catches up. That compounding effect is extraordinary,” Brughan explained.

He added that the 10 year difference makes a significant gap so much that even if the twin who invested 10 years later could triple their investment, they would not catch up.

He said the best way to teach the time value of money is through graphs, pictures and stories.

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The rule of 72

An easy way to teach kids how to save is by defining the rule of 72.

Grobler explained this term as a “simple rule of thumb”.

He said it tells you how many years it will take to double your money – if you leave it to earn interest at a certain interest rate.

“How it works is you divide 72 by the interest rate you are earning. So, 72 divided by the 7 we were talking about earlier, gets you about 10. At 7% interest, it will take the child 10 years to turn the R100 into R200. That is of course if they don’t add to this savings, which means their interest could be higher.”

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Furthermore, Grobler said by playing around with the interest rate you could demonstrate to kids how the time period changes depending on the interest rate you are offered, this also helps them to understand that it is good to consider the savings product you select.

Brughan mentioned that it is important to note that with high returns, comes high risk.

Ensuring your child saves as much as possible

Grobler emphasised the importance of making kids see saving as more important than spending.

“One of the things you can do, as an adult, and also teach your child from a discipline point of view, is to share the concept of budgeting. Discuss something simple like the grocery or household budget to explain income, necessary expenses and how much you aim to save every month. Involve children in basic family finances by discussing the family savings goals like a holiday, new car or retirement.

“And the way to look at it is not as a grudge saving, but rather as a gift, ‘I’m paying myself, for my future or my savings goals’.”

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Money responsibility and creativity

Grobler suggests involving children in small purchase decisions and encouraging them to come up with ideas to make money.

“Not only should kids start understanding early how to spend money wisely but teaching them to ‘hustle’ and talking to them about ways to make money is also important. For example, setting up a lemonade stand on the corner, walking neighbourhood pets or washing cars for extra cash. Encourage your kids to come up with ideas and open the conversation – money should not be a taboo subject,” said Grobler.

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Brughan said saving money could start as small as reading about how to do it, and being consistent about that. He then recommended the following books:

• Rich dad, poor dad by Robert Kiyosaki.
• Who moved my cheese by Dr Spencer Johnson.
• Think and Grow Rich by Napoleon Hill.
• Prosperous Heart by Julia Cameron.

By teaching children the value of saving and money management, parents can help them develop good financial habits that will last a lifetime.