Just because your children are now young adults, does not mean you stop worrying about them.
True, they are now old enough to fend for themselves. But making money is one thing; managing it properly is another.
Unfortunately, there is a good chance your children are more focused on living for today than building wealth for tomorrow. As a parent, it is natural for you to be concerned. So how do you get your children interested in money and finance?
By starting with these three things:
1. Introduce them to the power of compounding
If you could go back in time, you would probably tell your younger self to start investing earlier. That is why you want your children to knuckle down right now, before it is too late. The problem, though, is that young adults are particularly vulnerable to ‘hyperbolic discounting’ – the human tendency to value a smaller-sooner reward over a larger-later reward.
So, as a parent, it is important you drive home just how powerful compounding can be. One way to do that is to ask your children a trick question – would they rather get $1 million upfront or 1 cent that doubled every day for 30 days?
Once you have done the math with them (that 1 cent will compound into $10,737,418.24 after 30 days), they will look at compounding with a fresh set of eyes.
2. Teach them about opportunity cost
Opportunity cost and compounding go hand in hand.
As the 2020 Vanguard Index Chart shows, if, in 1990, you’d invested $10,000 in an index fund and not touched the money for 30 years, by 2020 your investment would have grown to:
- $130,457 if you had invested in Australian shares
- $186,799 if you had invested in US shares
- $0 if you had spent that money on a holiday or car instead
In other words, the relatively minor financial decisions your children make today can have massive consequences by the time they reach adulthood.
3. Switch from lecturing to persuading
When you are a parent, you learn the hard way that when you tell your children to do one thing, they often do the exact opposite instead.
So, if you lecture your children about compounding and opportunity cost, there is a chance they might disregard your advice as a way of asserting their independence.
That is why you might want to use ‘social proof’, one of the six principles of persuasion outlined in Robert Cialdini’s book, Influence: The Psychology of Persuasion.
Social proof, as Cialdini explains, is when we “use the actions of others to decide on proper behaviour for ourselves”.
Don’t promote yourself as the example your children should follow, because, as mentioned earlier, that might undermine your message. Instead, point to someone they admire – such as a friend, a celebrity, or their boss. That way, you stand a greater chance of persuading them that being interested in money and finance should be considered.
If you would like to have a confidential discussion about your family wealth, speak to Affinity Private Advisors today by calling 1300 769 304, emailing email@example.com or filling in this online form.
The information contained in this article is current as at 04/04/2022. Any advice or information contained in this report is limited to General Advice for Wholesale clients only.
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