Simple Tips to Encourage Your Kids to Save Money by Compound Interest and Why you should Start Saving for your Child?
The world has been through a rough storm in 2020 and it does not look like 2021 is going to get any better. New strains of the virus are continuing to cause infections, deaths and more damage to the economy and even if the virus is controlled in a couple of years, so that we no longer have to worry about it, it seems that the damage to the economy is going to cause trouble for the years to come.
2020 has brought about paradigm shifts in many sectors, industries and disciplines. Working from home is now a well-understood concept and practice in many sectors such as education. People have grown accustomed to the social distancing measures and no one can say anything about how the future might look like.
If we narrow down our analysis on the economy, we can see that while Australia has fared better than other countries, the efforts to cushion the economy have caused a depletion in the resources and if we look at the broader picture then Australia is a part of the global economy. So if the global economy crashes, the Australian economy will crash too.
Keeping this in mind, it is only prudent to adopt a personal financial management strategy that focuses on increasing the savings so that you can rack up the savings and multiply your investments in a safe and risk free manner before it comes to the worst. Of course, it may not come to the worst but one has to prepare nevertheless.
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Focus on Savings
This is the right time to start saving and if you already do it then increase the amount that you save. The last year has shown us that if required, the average household can easily take their savings rate. For instance the average savings rate in the USA is around 10% but the virus induced lockdowns in March – June period caused the household savings rate to go up to 30% to 40%.
This simply shows that we can take our savings rate up when we want. It has been observed that generally a household can easily take their savings rate up from 10% to 25% – 30% without making any drastic changes to their lifestyle.
So this is what you should be aiming at right now. You can do it gradually, aiming for 5% increments at a time. Keep increasing your savings till you have to make drastic lifestyle changes, at which point you can consider whether you want to continue increasing your savings or not. This decision will depend on your short and long term financial goals.
Save for Your Children
If you have got children, then it is absolutely vital that you save for them. Think of it like this, the boomer generation grew up under the best financial circumstances. Now the boomer generation did not focus that much on personal financial management because frankly they never felt the need to do so. The economy when they were earning was good, they did not see financial crises like the millennials are seeing right now.
The millennial generation grew up seeing the Asian market crash of the 90s, the Dot com crash, the Global financial crash of 2008 and now the Covid-19 pandemic and the crisis triggered by it. Generation Z and the future generations are going to inherit a world that is going to be very unstable and different from what it is right now.
Parents therefore need to have the foresight to see that their children may face even worse financial crises in future, perhaps wars even. We cannot say what the future will bring but we can all act in a prudent manner to secure the future of our children. For this reason it is absolutely vital to start saving as much as possible for your children.
If you have just got children, then it would be advisable to get in touch with a financial planner or investment advisor and get yourself into a savings plan for your children. Perhaps what you can do is, take out the savings you have for your children and invest them into profitable investment options such as stocks, bonds, ETFs, index funds etc. This way your savings will also grow over time and provide you with an income stream that can either be used to fund the expenses of your children or it can be reinvested to increase the amount of savings.
Teach Personal Financial Management to your Children
Having good personal financial management skills is absolutely vital in this day and age. As we have mentioned above, the boomers did not have the need to plan financially as much as we do today. The world is in crises and therefore every financial decision that we or our future generations take, will have to be taken with proper consideration.
Personal financial management is a very crucial set of skills that can mean the difference between being financially independent or indebted. Furthermore, having good financial management skills is like having a good habit. Good habits take time to catch up, you cannot learn a good habit overtime. This is why it is so important to teach children the basics of financial planning such as saving, investments and related concepts from a very young age.
Start off by teaching them about the four pillars of financial management namely
Compounding is a very vital concept that children must learn from a young age. Why? Compounding is the secret to wealth creation. You cannot create wealth if you simply save your money, but you can create wealth if you save then invest and then reinvest the returns, thus compounding your savings and investments.
Start off by teaching them what compounding means, perhaps you can work out a little game or experiment where you agree to compound their pocket money if they do certain chores. A simple google search will present you with many games and exercises that are suitable for young children to learn the concept of compounding.
Get them started early because if your children grow up knowing the details, tricks and techniques of good financial management, trust me by the time they are in their late teens, they will have their financial goals worked out.
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