PlayMoolah

A distant family relative of mine led a happy, carefree life until his early forties. He had a modest income, simple needs and he didn’t aspire to live a more affluent lifestyle.

Then the death of a parent left him with a sizeable inheritance. After he had passed through the stages of grief, what do you think he felt about the six-figure sum now sitting in his bank account? Joy? Excitement?

Actually, it was pure panic. There were midnight calls to relatives who were reasonably well-off to ask for advice. He wallowed in indecision on what to do with the money for months.

You hear of lottery winners and recipients of large inheritances squandering their money. Sound familiar? Sudden wealth can bring psychological problems, familial conflicts, reckless spending and a loss of money, friends, family and health.

Is it too early to teach our children sensible practices when it comes to managing windfalls? Perhaps to adults a present of a small sum of money during Chinese New Year is just a token.

But for someone who has no income and who has to ask Mummy or Daddy to buy an ice cream or some colouring pencils, the CNY loot – no matter how small – is a windfall and its mere presence can lead to confusing thoughts.

There are some simple steps that you can follow to help your child learn to cope with this sudden ‘wealth’.

1. Don’t make any decisions
Well, all right, we didn’t mean to do absolutely nothing. While Junior may spend the next week or so bugging you for this or that, remain strong and do not buy anything. Let him know that you are thinking about his request, and that you have not come to a firm decision yet.

Better still, simply defer any spending decisions until your child is over the sudden euphoria. This will happen sooner rather than later, as new concerns crop up in his life and his attentions are directed elsewhere.

When you are both are safe from irrational decision making, sit your child down and explain the benefits of saving his money. Then park the money somewhere safe, in the savings account for example.

2. Allocate some play money
As any parent will know, if children are asked to totally abstain from having any fun with their money, they will pester you until you succumb to some irrational decision making of your own. Like giving in to their wants, to save yourself from total aggravation. So agree on setting aside a small sum (5-10 per cent) for them to purchase anything they wish. This way, everyone is satisfied. Mostly.

3. Review after six months
This is when the impulse to splurge wildly has passed and your child has had time to think about his or her dream purchases. With some sensible advice your child will have a plan of what to buy and good decisions will be made.

The goal is to instill an appreciation for planning and avoid making decisions that would be regretted later. And as a parent, that’s not a lesson we want to regret not teaching earlier.

So are there ways to help a child learn how to manage money more confidently?

A simple one might be using a wishlist to manage impulse requests. There is so much to buy and so much to want! And all parents dread the spectacular tantrums that kids can conjure up if they really really really want something.

Have your child prioritise the items on their wish list, and help them reflect on why they want something more than the other. Remind your kids to be discerning in their wish list and you might see the impulse request for random toys lose their place to more worthwhile items.

Better still, work within a budget and encourage them to do extra chores around the house to earn money and save up for that jaw-dropping, playground awe-inspiring must have item.

Subscribe for our postings on finance and online games for children by sending an email to dearaddy@playmoolah.com with the word “Subscribe” in the Subject line. DearAddy is a doting mother of two boys, former finance professional, marketer and mummy-in-residence for Playmoolah.

I just spoke to a mother at one of our focus groups, who was quite anxious about the spending habits she might have taught her daughter.

Her daughter’s recent statement: “It’s too cheap, we should just buy it” started this introspection.

That, plus the fact her daughter was going to be responsible for managing her own allowance at school, contributed to an anxiety attack.

Ours is the behaviour our children learn from, and how we manage money is one of the most important lessons we can impart. Our poor friend is now over-analysing the times she spent on impulse, or perhaps gave in to requests for expensive presents. So what are some of the harmful behaviours we might unknowingly pass on to our children?

Living Beyond Your Income

This isn’t about avoiding debt. Not all debt is bad; borrowing to invest in assets that appreciate is different to financing “fun”. Luxuries like branded clothes, fancy dinners, or a car depreciate in value.

A child will associate how you spend with what you do. Recognising when your spending is tied to emotions or ego is the first step to moderating behaviour. Doing so will teach your child to avoid adopting imprudent patterns of spending.

Waiting Too Long to Start Building Assets

Despite the smaller income stream, it’s easier to save disposable income in your earlier working years. Financial responsibilities grow over time (spouse, children, aging parents), so begin saving a percentage of your income as soon as possible, and invest in income generating assets. Let your hard earned money start making money for you.

Children need not be bothered with the complexities of multiple bank accounts and what they are for. But there are simple fun ways to help them visualise how income should be allocated for different purposes.  Some parents teach children to separate their pocket money into three jars, one for saving, one for spending and one for giving.

Confusing Wants and Needs

Even very young children can appreciate this lesson. Talk about things you want, but don’t need, and therefore choose not to buy. Talk about other uses for the money.  The anxious mother in our example felt she had over indulged in her daughters whims; and was now having trouble explaining why her daughter’s spending had to be reined in. Particularly when the household income was unchanged.

Windfall = splurge

Well, it’s free money isn’t it? The temptation to use an unexpected bonus, a cheque from Grandma, or a pay raise on luxuries is tempting. It’s not part of the savings plan, and therefore doesn’t derail your financial planning, right?

Wrong.

Many people see their parents using that windfall on short-term rewards and emulate that behaviour. Instead, use that income to pay off debt, invest in blue chip assets, or put it in a separate account to see how fast it can grow. The numbers in that account won’t look “last season” in half a year, unlike a Prada bag.

Avoiding Money Discussions

Ignoring money problems won’t make them disappear. Concealing money matters (whether good or bad) from children denies them some of the most important life lessons they need to succeed.

When household finances are discussed in an age-appropriate and calm manner, children learn to be confident in managing their own money. When parents convey stress while discussing finances, then children learn to associate money with fear, and feel unable to handle their own finances later on.

Subscribe for our postings on all things to do with children, finance and online games by emailing dearaddy@playmoolah.com with “Subscribe” in the Subject line. DearAddy is a doting mother of two boys, former finance professional, marketer and mummy-in-residence for Playmoolah.