Effie Zahos from Money Magazine says she is trying teach her kids the value of money and the power of compound interest.
Kevin: A fascinating topic: what advice should be giving your children about money, and what advice do you wish someone had told you when you were younger? Effie Zahos is the editor of Money magazine and also the author of that great book The Great $20 Adventure.
Good day, Effie.
Kevin: Good to be talking to you again. Tell me, what finance and investment advice do you give your kids?
Effie: Believe me, I do give them quite a bit, because the one thing I don’t want to be stuck in is a situation where they’re still at home when they’re 30. I think it’s very important for all parents to get their kids financially savvy, because we are in a situation where kids are not wanting to leave home, and why should they? If we make it too comfortable for them, they’re going to stick around.
The thing I teach my kids with money – I have a 10-year-old and a 15-year-old – are very different in their approach, but really the value of money is important for them to understand, and we do live in a society now where they probably don’t see a lot of cash. A lot of it is done over the Internet, through cards and so on, so they’ve really lost the value of money, the meaning of money, and the importance of compound interest.
Both my children do understand what compound interest is – interest on interest – because it’s only then that they get excited about saving.
Kevin: My earliest memory of money was the smell of money. I used to love opening my birthday card or Christmas card or whatever it was, and there would be money in there, and I could smell it.
Effie: Yes. They don’t have that now, do they? That’s gone. And money flows out too easily. I actually believe once a child can count, then they should be introduced to the world of money, and get them to actually spend it, use it, make mistakes.
Whether you pay them pocket money or not, that’s kind of irrelevant – and that’s really up to you as parents or guardians to work out how to manage that – but it’s important that they understand… This is a tip that goes right through life, and editing something like Money Magazine for 20 years, I’ve seen people who earn six-digit figures who can’t put together a couple of hundred dollars. Then I’ve seen others who are on the minimum wage and manage to buy investment properties as well as a homes.
It’s not what you earn that counts; it’s what you spend, and I say that to my kids quite a lot. And because they do manage their own money and they have a bank account, they know exactly “If I do spend this, it’s gone. The cash has gone out of my wallet.” I have a 10-year-old for whom now the pain of spending money is far greater than the pleasure of buying something, which is great.
Kevin: It’s difficult when you’re young to understand that there comes a time in your life when the money that you frittered away when you were young would have been even more valuable as you get older. We tend to live for the present. I know in my generation, we did. “What the hell, we’re young; we have some money in our pocket; let’s just have some fun with it.” Saving didn’t seem to be as important as it is today.
Maybe it’s just because I had gotten older, I don’t know.
Effie: I think age does bring with it wisdom. And you’re absolutely right; I look around at 20-year-olds and you talk to them about super, and it’s like, “What? No, I’ll never be that age.” But probably one of my biggest regrets is that I did not salary-sacrifice when I started my first job.
I finished university, and then I did a degree in economics and worked at a major bank. I remember this day clearly, because my mate who was sitting next to me did say he was going to salary-sacrifice.
A financial advisor came around and said, “Would you like to put some of your pay into a superannuation fund?” And I was like, “Are you kidding me? No.” Had I done that today, just put away $50 each pay – and I was paid fortnightly; it was only $25 dollars; I wouldn’t have noticed it – my super fund would be a lot more healthier than it is now.
Sure, I’m catching up now, but it’s the little things. Like if you cook one extra meal at home each month and you put that in your super fund, you’d have an extra $40,000 almost there. It’s the little things that count, and that’s the thing you have to get to your kids.
But more importantly, do involve them in your finances. I find that once my children understand how hard it is to earn a dollar and how it’s spent, they appreciate it more. So they get involved in the family bills. They see the electricity bill, they see the phone bills, and they get a good understanding. They manage their own phone plans, so they know when to go somewhere and get free Wi-Fi data instead of using their own, so they appreciate it more.
I think if you shield them from your financial affairs and make out that everything is okay and everything is easy breezy, you really are doing a disservice for them.
Kevin: That’s a very valuable lesson, isn’t it? It’s a great insight. Kids with money, do you think that they should be made to save money, or should they be shown the benefits of it? There is a difference.
Effie: There is a difference, but I am from the old school, that you just jump in, throw yourself into it. I like the tactile approach of you having to save yourself and spend yourself. You can do all the theory you like, but for me, I learn best if I’m doing it myself.
I think in the case of kids, give them an account. Get them to save some, get them to spend some. Exactly what ratio that is, I’ll leave that up to your listeners to do. But if they don’t actually open it and do the mechanics themselves, they don’t really appreciate or understand it.
Then from a parent’s point of view, if your kids are serious savers, do understand the tax implication of things. Children don’t pay any tax on the first $416 of unearned income, but after that, the tax rate can be as high as 68%.
Effie: So, if you’re stashing a bit of cash, maybe get some expert advice as to where or whose names it should be in. If you’re buying shares for your kids, you can’t buy them in your kids’ name if they’re under 18; you have to buy it as trustee for your children, and then you can transfer it to them later without paying capital gains. Once you start moving to the bigger end of town, you do need to think a little bit and be strategic with them.
But if you have got younger kids – like 9, 10, 15 – open a kids’ account. They’re not going to get rich with it. I can tell you better places to put your money than in a bank account, but that’s not what it’s for. It’s really to teach them, to show them, “Go online, see the statement, see what interest you’re earning.”
The sad reality is like my 15-year-old said to me the other day, “I only earned a dollar interest, are you kidding me?” because rates are so low.
Kevin: Are we good at teaching our kids financial literacy in schools?
Effie: We haven’t been for a long time, and I really have to thank my boss in a way, Paul Clitheroe, for putting financial literacy onto the school curriculum. Now, it does differ from school to school when it gets introduced and in what subjects, but it’s only just starting to really roll out in schools – and it’s about time. I think financial literacy should be taught in all manners.
When you think about, say, music – let’s say your child is gifted, creative, and so on – who better needs financial advice than someone in the arts? Because their income is so irregular, they have to make their pay last for ages, so any way they can sneak financial literacy – it applies to everything with do – can only do better for the economy as a whole.
Kevin: Indeed, great talking to you. Let’s round this chat out with a bit of a plug for you, too, The Great $20 Adventure. I’m a great believer in that. Where do we get it from?
Effie: That’s from magshop.com.au. You can buy it online, or in any good book store. This book really came about because my son kept spending everything he had. He just would not save. So these characters came to life, I think after a couple of arguments with my son, and maybe a nice glass of red, and these are characters we meet in real life.
A little boy gets his hands on some birthday money and he automatically thinks he has to spend it, but his mother says, “Go for a walk,” and he comes across these animals. You have Donnie Dangerous who guarantees to double it. Believe me, I’ve met a few Donnie Dangerous in my life. You have Ms. Pennysaver who says save, the entrepreneur, Queen Bee, Mr. Giving, the philanthropist. So this child is left with a big decision to make and realizes that you can do more with your money than just spend it.
He definitely changed his tune: he doesn’t spend a cent now, which means he’s costing me more.
Kevin: Well done. Well worth writing the book.
Effie: It was.
Kevin: It’s called The Great $20 Adventure, written by Effie Zahos, who has been our guest. Effie, of course, is the editor of Money magazine.
Effie, always great talking to you, thank you so much for your time.
Effie: Thank you.