What important financial lessons do parents need to share with their teenagers and young adults? Here financial advisers Erin Truscott of Direct Wealth and Regina Taarnby of Morgans outline some smart ways to educate and motivate offspring.
As parents, how do we know when our kids are ready to make their own financial decisions?
Regina Taarnby: It’s hard to put an age limit on it. It depends on your child's maturity and how well they understand the fundamentals of money matters – whether you as a parent have helped educate them or if they have had access to any teachings or resources previously. I think supporting your child with money decisions from a young age, right up to when they get their first job, will give them a better backbone to make smart money decisions.
Why is it important for young people to start contributing to their super early?
Erin Truscott: When parents bring their teens to me and we have a conversation about super, I usually begin by asking: "If I told you to give 10 per cent of your income to me, how would you respond?" Often they say, “Why would I just give it to you?” And that’s how I start the conversation on super. They need to understand it's their money, which they're saving now for later. Super is the most tax-effective structure we have, and if you start early, you can absolutely set yourself up for such a positive future.
What are some common mistakes people of all ages make around super?
Regina: Many people tend to make three common mistakes:
- Not paying attention to what is being paid by your employer.
- Not paying attention to where your super is sitting, if it includes any insurance and what the fees and costs are.
- Not knowing how the super fund is performing and where your money is invested.
When should young adults think about getting their own financial adviser?
Regina: I suggest young people see an adviser when they get their first full-time job, unless they have come into a lump sum of money previous to this. Typically, once you’re employed and have money coming in, you’ll want to start planning your own financial goals. You'll want advice on ways to invest your savings and you might even be looking at eventually buying a property.
What’s the youngest client you have advised directly?
Regina: I’ve worked with a 19-year-old who came to me following a compensation claim payout. I’ve also worked with clients in their mid-twenties who have come out of uni or got their first full-time job. I feel Australians in their early twenties now have access to a lot more resources, with social media groups, podcasts and books being written in an easy-to-understand way. They know they want to achieve their goals and are more open to getting help to achieve them.
Erin: My youngest client is 26, and I started looking after him at about 23. He had a really positive money story and good values handed down from his parents, so is a great saver. He’s just purchased his first home and a little investment account that he tops up monthly, so he’s on track for a very positive financial future.
What are some of the first financial topics a young adult should speak with an adviser about?
Regina: Many young clients I help already had good money values instilled into them by their parents. When they come to me they want to start doing the right thing, but they might not know how to go about it. People are more educated these days, and they understand they need advice around cash flow, debt, super and investing. They know the basics, it’s just how to apply that to their individual situation.
I don’t think there are enough conversations about protecting their money. Whether that be having emergency buffer savings, income protection or insurance in general. They'll talk about insurance for their car or property, but they don't think enough about insuring themselves.
Young people often think they’re invincible and nothing could impact on their earning potential, such as illness or accident. I like to educate clients on the importance of building a protection plan that covers savings and personal protection in the form of income protection, life, total and permanent disability and trauma insurance.
Erin: I always ask them what their biggest asset is, and in fact it’s their income. When you’re young it's hard to think about protecting your income, because you're watching every dollar. So I talk with them about how they'll manage if they can’t work.
The overarching message for young clients is the lesson around creating wealth and then protecting it. If they have bad habits, they need to start by sorting out cash flow and turning bad habits into good ones. This is a coaching process, but it works over time if you stick with it. Young clients always seem to protect everything but themselves, so I hone in on this and ask them what their biggest asset is – their income – so they can give this some thought, and get some good protection in place.
What are some dos and don’ts for parents having a conversation with their kids about money?
Erin: First, don’t make money a taboo topic. Your children need to have confidence with their money, and be able to live within their means, and say no to the things that don’t fit within that plan. As a parent, we also need to lead by example. So many times I see this ‘keeping up with the Joneses’ approach, and it’s an unhealthy way to work with your money. Feeling empowered to make the right financial decisions is very important.
The second aspect is to have respect for your own financial well-being. Don’t put yourself into a bad position. These days there's too much credit available, and it creates the wrong impression that money is free. We need to educate our children about the actual value of money. This will give them the best possible start.
Regina: Use age-appropriate examples to help your children understand money. And lead by example. That means being open and honest about how you manage your own finances, show them how much it costs to buy groceries and pay a bill, or how much pocket money they need to earn to pay for something they “must have”. Talk with them about your experiences and what you have learnt.
It's always important to support young people through their own financial decisions, though when they're older they'll appreciate having someone neutral to talk with about money, such as a financial adviser.
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