4 key money habits to impact to your children when young

Who we become when we are adults always stems from what we were taught when growing up and especially what we learnt from our parents. As your children grow, they are always observing how you earn, spend, save and invest your money. To ensure that they grow into being financially free individuals, you should start teaching your children the right money habits and attitudes from their tender age. This will result to them being more prudent in personal budgeting and financial planning when they grow up; and avoid the rat race of earning to pay monthly bills without saving and investing for their future. Explained below are 4 key money habits that will help shape your children’s view of money as they grow into adulthood.


  • Be a good role model for your children on financial management


As mentioned above, children learn a lot of habits by observing their parents and picking from them certain behaviors and character traits. Your children watch how you spend your money and pick financial management tips from you as they grow. If you are always out in the malls shopping with them, they will get the impression that you can always spend as much as you want and get anything you want anytime. If you eat out a lot as a family, the children will also pick up the habit and they will never learn the habit of buying groceries and cooking at home in order to save on monthly food costs. To be a good financial role model to your children, teach them how to be frugal and how to spend money on the important things first; so that they learn the art of budgeting and prioritizing their financial obligations.


  • Instill the virtue of delayed gratification in your children


Most parents give in to every request that their children make just because they have the money to buy them the things that they want. However, this creates a perception in the children that they can always have whatever it is that they want whenever they want it without considering the financial implication of the unplanned shopping. Ultimately, the children will grow into being careless spenders who cannot delay their immediate desires in order to save for a bigger goal in the future.

To prevent this bad money habit from developing, you should learn the art of letting your children know that they cannot always pick items in a supermarket that were not part of the shopping list. When they request for gifts and toys, always ensure that before they get them they either work for them or they wait for some special occasion in the future for them to receive them. This will teach your children patience as well as help them to learn the fact that they need to work for and earn whatever gift or toy they get.


  • Teach your children how to save in order to fund their long term goals


Children need to learn from an early age that not all money they earn should be spent immediately. They need to be taught how to save towards acquiring a toy or any other thing that they would like to have. When your children get some pocket money, teach them to save at least one third in a bank account and spend the remaining on important things today. Every month get them their bank account statements to show them how their savings are growing towards the total amount they need to buy a bike, toy or pay for their trip to Disneyland.  This will keep them motivated to save more and after saving towards two or more goals successfully, they will have developed the savings culture that they will carry on into their adulthood.


  • Let your children learn from their mistakes at an early age


If your children want to spend their savings recklessly on some trivial items that they will regret later on, just let them go ahead and do it. After saving for a long period of time and delaying their gratification, they will learn a sad lesson if their savings go into buying toys or other things that breakdown or get finished in  short period of time. They will regret having saved for a long time only to waste the money in short-term items; and this will help them to be more cautious next time when planning how to spend their savings.

In summary, let your children learn from your financial habits as their parent and give them a chance to make and learn from their mistakes early on before they start earning their own money as adults.

Making Rational Investment Decisions

Bias can have a powerful effect on our decision-making process when investing in unit trusts. If someone tosses a coin 10 times in a row and each time it lands on heads, then what would your choice for the 11th toss be? You may assume that the trend continues and call heads or, believing the trend will buck, you choose tails. Statistically though, there is still a 50% chance that it will land on either heads or tails.

Bias is the reason most of us tend to choose either heads or tails. When we are presented with information, we tend to interpret it according to our personal biases. Our biases and our reaction to the information may prove detrimental when we apply it to investments.

As a counter example; consider an opaque bag containing 50 white and 50 black marbles. If 10 black marbles were removed from the bag, what colour would the 11th marble be? Most of us would say white since the probability of picking out a white one is higher (50 of the 90 remaining marbles are white) than picking a black marble. Unlike the example of the coin toss above, the information we are presented with between removing the 1st and 10th marble is relevant in guiding our choices for the 11th marble.

Emotions may hinder investment success

Heuristics are shortcuts our minds develop that allow us to analyse information and rapidly make decisions. They make our lives easier, but may also lead to errors in judgement.

Scientists have identified over 100 behavioural biases. These include: Confirmation bias, which means we search for information to support our views or beliefs and over-extrapolation, which occurs when we depend too much on a particular piece of information. The more common biases we all experience are fear, overconfidence and greed.

These biases may affect your behaviour, and therefore your success, as an investor.

A good example is the investor behaviour surrounding the global financial crisis. In South Africa, the stock market yielded returns of close to 36% per year for the 5 years prior to the crash in 2008. This lured investors in droves. Many investors paid overly inflated prices, by investing at the top of the market. Then followed one of the worst sell offs in market history. Approximately R9 Billion was withdrawn from property unit trusts and equity in the first three quarters of 2008 as fear-gripped investors exited the market. This meant that investors locked in their losses.

Try not to lose your head

Investors who remain calm during times of uncertainty are often rewarded for their patience. An investment at the peak of the market in May 2008, would have incurred significant losses by November 2008. But this is not the full picture as the market recovered 2 ½ years later and any investors who did not succumb to their emotions made back any losses and, in absolute terms, more than doubled their money by September 2016.

Don’t toss coins, pick marbles

Many people who invest use the same heuristics as they do for the random coin toss. This often results in a poor outcome. However, assessing information and using it where relevant (i.e. the marble in the bag approach) tends to yield better results.

How can we overwrite these biases? Believing the investment philosophy developed by your investment manager and understanding the unit trust you invest in makes it a bit easier to sit through market fluctuations. This allows you to benefit from the upswing when it does come around. Rational thought over emotional response is vital to a successful investment.

Find an investment strategy that is tailored to your needs, risk tolerance and time horizon. This will help take the emotional element out of your decision-making. Long-term strategies should not change if markets are volatile. An independent financial advisor can help you stay focused on your goals even when your emotions threaten to overpower you.