Think back to some of the financial lessons you have learned through your lifetime. For some of us it may have been a running battle with credit card debt. Others may have had a struggle saving for any long term goal when the lure of a new car or a splurge on a holiday became overpowering.
Eventually most of us learn from these challenges and hopefully pick up enough financial sense along the way to create some degree of financial independence in our latter years.
What about the next generation? It seems they are faced with even greater challenges than we were, with home prices skyrocketing in recent years and the pressures of consumerism and the ‘disposable society’ becoming an ever-increasing temptation. This makes it essential for us to take the lead with our kids and grandkids and pass on some money tips that they can use to make life a little more secure and little less financially stressful.
The weekly struggle to balance a comfortable lifestyle against making provision for future financial security is never going to be an easy one, but there are some common sense habits you can pass on that are both simple to implement and produce real results.
One key habit is to commit to saving before you spend. In other words, allocate a manageable savings percentage to come out of your income first, before you start thinking about what you need or want to spend. Those who use the opposite approach of spending first and trying to save what is left over will always find it a constant battle to achieve any kind of financial independence.
Once that ‘save first’ mindset is working, then you can refine your saving strategy around goals with different time frames. Some may be dedicated toward a medium term lifestyle reward, such as home renovations or vacations, while a proportion should always be allocated toward long term financial independence in a variety of savings and investment vehicles. This can include superannuation, a share portfolio, managed funds or property investment. The secret is to keep the allocation to each goal completely separate, so that you are not dipping into your long term ‘savings pot’ when you stumble over the latest special in a furniture store.
Once your savings regime is sorted, then you can budget the rest of your income to enjoy a lifestyle that is within your means. A lot of the negativity that surrounds budgeting comes from a perception that it is all about making cutbacks on your lifestyle and keeping tedious records. A better way to approach budgeting is to treat it more as a method of allocating your income ahead of time to those things that are important or necessary for your lifestyle. A little planning ahead can save a lot of stress down the track.
Fortunately there are great budgeting systems available online or via a smartphone app which can help you set up an income allocation system that works simply and effectively.
Put a ‘dollar value’ on your life
Perhaps the most important lesson you could pass on to your offspring relates to maintaining their financial independence when adversity occurs. Before the age of thirty, most kids think they are bullet proof, but we know from experience just how fragile life can be. Illness or injury can strike unexpectedly and can rock the foundations of the family unit.
The financial risks that such events carry are simply too great to leave unattended. Instilling in our children a sense of their ‘human life value’ and the need to protect it with personal insurances, such as life cover, income protection and trauma insurance could be the best thing you ever do for them.
Understanding human life value is simply a matter of considering their income earning capacity over a lifetime and what the consequences are of that suddenly being taken away. A simple visit to a financial planner to assess the risks and put some cover in place can save the financial future of a young family.
Legitimate tax minimisation is a critical part of any investment strategy and as our kids grow their wealth they should be taking advantage of the opportunities that are available for income earners. This includes concessions available through superannuation, such as salary sacrifice strategies, low income co-contributions or spouse contribution tax offsets.
Tax advantages also exist in non-super investments, such as franking credits on shares or negative gearing on property or share market investments, so it pays to engage the services of a good financial planner to help develop a strategy that can take advantage of available tax incentives.
Investment is about growth, not gambling
Some younger people perceive that investment is all about picking winners to get rich quick. A valuable lesson you can pass on is to help your kids take a more pragmatic view of investment. They need to see it as a life-long process that uses principles such as diversification and dollar cost averaging to grow wealth methodically. This includes viewing higher risk investments, such as shares, as a tool for long-term growth, rather than a way to make a quick win.
Building a dynamic and durable portfolio takes a lot of professional skill and this is where a financial planner can add so much value, through research resources and asset allocation strategies which meet a person’s risk profile.