When Warren Buffett, the American investor often referred to as “the Sage of Omaha” for his skill at choosing investments, turned 87 last year, some journalists called attention to the fact that he had purchased his first stock at the tender age of 11 – three shares of Cities Services Preferred, to be precise, at US$38 a share. Young master Warren bravely held onto these shares when the price immediately dropped to US$27, but sold them as soon as they reached $US40, these journalists noted.
What many parents today wonder is just how much they should encourage their children to take an interest in money, and wealth, and at what age. Should they, for example, encourage their offspring to follow the example of 11-year-old Buffett – and if so, should it be stocks, or bonds, or cryptocurrencies? If their youngsters really aren’t interested, how much, if at all, should they force the issue?
And, many parents wonder, could there be more subtle yet equally effective ways of ensuring that one’s offspring enter adulthood with a realistic approach to wealth, and saving for their future, than insisting they begin managing an investment portfolio at an age when they’ve only just stopped believing in Father Christmas?
Here, Paul Gambles, the Bangkok-based head of the MBMG financial advisory and wealth management group (pictured above), who is himself a parent, considers this familiar dilemma.
One of the great mysteries of modern life for many adults is how best to manage their money, largely because children aren’t usually taught the basics at home or at school. Even universities don’t regard preparing students to manage their finances as their responsibility.
Nor is the money management education some individuals actually do receive as youngsters and young adults updated during their lifetimes to reflect changes in the marketplace – which is why we financial advisers see so many adults today managing their finances as though the gold standard were still in place. To put this in context, this is a bit like basing one’s travel arrangements on what the norm was thirty years ago.
And if there was ever an era when people needed to be clued-in to wealth management issues, it’s this one. Today, easy access to credit has enabled entrepreneurs to start businesses; individuals to buy homes; students to accumulate degrees (which too often have subsequently proved difficult to monetise); and given many people around the world access to the latest technology and consumer goods.
But the downside to this era of easy credit, of course, is that amount of private debt which has been accumulated around the globe – especially among what the Bank of International Settlements calls Advanced Economies – has become colossal. This debt mountain was, in fact, one of the main factors behind the global financial crisis in 2008, and the situation has not gone away.
The modern global addiction to debt has fostered a buy-now-pay-later culture that makes the business of managing one’s money a more challenging task than it would have been back in 1941, when an 11-year-old Warren Buffett first began investing in the stock market.
What’s more, in attempting to encourage people to consume more by making debt cheaper, many central banks have encouraged commercial banks to offer lower rates. As a consequence, savers have to scramble around to find bank accounts that offer interest rates even as high as 1%.
Then there’s the fact that in some countries – such as the US, for example – the student loans sector has become the fastest growing type of household debt (see chart, below). This now exceeds the total stock of high yield corporate debt, and is experiencing systemic levels of default.
All this makes a compelling case for educating our children in how to manage their money. But it doesn’t tell us when we should start, or how best to teach them.
In my view, the answer to “when” is straightforward: the earlier, the better.
That doesn’t mean that parents should start charging their little ones rent when they’re two years old, obviously. But once they’re old enough to do basic addition and subtraction, the concepts of saving and spending should naturally follow.
The question of whether such financial education should be done at home or at school could set off a debate lasting several hours. Personally, I think it’s such an important issue in today’s world that both parents and teachers should be involved.
I realise that schools have an ever-growing number of subjects that they are tasked with ensuring children take on board these days, but the importance of money management cannot be overstated – as, I’m afraid, too many people who’ve lost their savings to scammers in recent years because they didn’t know any better would agree.
In 2016, the Money Advice Service – an independent body set up by the UK government – published results of a survey involving just under 5,000 people. It found that only 40% of those surveyed, between the ages of 7 and 17, had received any kind of financial education, and just 7% of children said they’d taken the time to speak to their teacher about money.
At home, the same survey revealed that only 61% of parents admitted that they felt confident talking to their children about money, and only a third said they involved their children in discussions about household finances.
The research also showed that when young people don’t receive a financial education, they’re not properly prepared to manage their own money when older. Among the 16- and 17-year-olds surveyed, 32% said they didn’t have any experience of depositing money into a bank account, 39% said they didn’t have a current account at all, and 59% said they couldn’t even read a pay slip.
Meanwhile, a 2015 report by the Organisation for Economic Co-operation and Development revealed that around 25% of children in 15 countries surveyed were found to lack even the most basic level of financial literacy proficiency. (The US, interestingly, was at almost the same level as the study’s average.)
It may take a while to convince schools to teach financial maths, especially as they are linked to national or international curricula, so for now, at least, it’s probably best for parents to start things moving at home.
A 2017 study in the US discovered that the parents who said they discussed finance with their children at least once a week were found to have youngsters who were more likely to express confidence about money matters.
For me, though, parents engaging with their children over financial issues should be seen as just the beginning. Personally I think it’s crucial that young people quickly learn about such concepts as, for example, how compound interest works, and why diversification of investments is preferable to putting all of one’s money into a single investment, and why putting a little bit of money aside in a tax-deferred account every month is preferable to spending every penny that one makes.
Imparting these basic concepts has got to be a priority, if we are to ensure that our children have as much financial security as possible once they reach adulthood, and beyond.
Here’s why: we can compare someone who starts saving monthly from the age of 10, with a relatively small base amount and monthly deposits, with someone who didn’t start saving until they were 30 years old, with a significantly larger deposit and monthly savings.
Let’s use an interest rate of 2.25% as a basis – the highest savings account interest rate available among banks in Thailand today.
If both of them save until they’re 40 years old, we’d get the following results:
It just goes to show that if we educate our children in financial matters early on, they’re equipped to use money wisely, while totting up that vital compound interest on their nest egg.
Paul Gambles is managing director of the Bangkok-based MBMG Group. He was the subject of an International Investment profile in 2016.