I have come across a lot of discussions recently around whether to charge board to your kids once they are earning an income, some have said yes to cover costs, some no, some yes but we will bank it for you, so the question is what do you do?
You child has gained their first job.
Yippee you think, I can now charge them board and recover some of the expenses they incur while living under your roof, right?
You might want to think twice before doing this. I have seen a lot of discussion around this in recent weeks and thought I would put my thoughts together on the topic.
So, your child has entered the workforce, it could be casual or part-time work.
So is now the time to start charging them board? Besides they need to learn to pay their own way, right?
That is the million dollar question, after all, they have cost you a fortune to date and most probably will for many more years to come.
I’ve heard it all from people who are charging board, taking a set amount of their income and some that use it as a way of forced saving for their kids.
Here’s my two cents for what it’s worth.
It’s most probably one of the most important skills you can teach your children at this stage in life, skills that will most probably have the biggest impact on their live.
Money lessons taught at a young age lead to better money habits in the future, and that’s just it, it becomes a habit.
So, do you charge board or not?
I would say no however what you can do is explain to your child, that you could do one of two things, charge board or alternatively take a percentage of what they earn (I would make it 50% of what they earn) and put it away in a savings account for them to access in the future. Some them the benefits of one of the great wonders of the world, compounding.
You still cover the basics as you are already doing this anyway and they pay for the extras they want.
This is a great opportunity to help set them up with some really valuable money habits.
I would make it a non-negotiable while they are living under your roof.
If they are young enough and you expect them to still live at home for some time to come you may also help them invest in growth assets such as shares both locally and internationally.
I would suggest using Exchange Traded Funds (ETF’s).
What are ETF’s?
They allow you to access certain investment markets in a single investment.
History shows that investment managers find it difficult to outperform markets and if they do they can’t do it consistently.
Therefore aim to capture the market return for certain asset classes and reduce the risk you will underperform. We use them across the board for clients, it gives them broader access to investment markets without unnecessary costs.
I would extend this to include both local investments and overseas.
However, if investment properties are your thing, you could use this to help them save for a deposit on a home for your child to start their road to wealth.
I think it is important to teach them the basics at this stage if you haven’t already.
1. Save a percentage of their income on an ongoing basis, live off the rest.
2. Don’t spend more than they have. If they want bigger and more expensive items, teach them to save for them.
3. Apply the rule of 72. If they are looking at purchasing an expensive item, ask them to wait for 72hrs and it if they still think they need it the go-ahead within reason. You’ll find more often than not that they will not make the purchase.
4. Ask the question, how is this going to add value when making a purchase? Yes, there are necessities that we need to just live but there are many purchases we make on an ongoing basis that really don’t give us any real benefit. You forget about it after a while. I’m sure you’ve made a purchase that is sitting in the back of the cupboard somewhere never used.
5. Teach them the benefit of long-term investing. Now for most young people, this is not going to be that exciting as they all live for the now. Find something that is relatable. Don’t go talking about saving for retirement, that’s not going to get them excited. But having the funds to travel extensively or owning their own home will. It’s the small steps implemented now that are going to give them the biggest bang for their buck in the future.
6. Don’t go out and buy an expensive new car. Either save and purchase a reasonable second-hand car. Perhaps save what they would have used on a car loan and upgrade with cash along the way. They don’t need to live a champagne lifestyle on a beer budget.
7. If they are looking to purchase a property. Teach them to be sensible, start small with what they can afford and upgrade as their financial position improves. I’ve seen too many young people who want everything, purchase way beyond their means and be miserable wondering why they can’t afford anything else.
8. Teach them to structure their accounts. Money for spending, money for saving and money for longer-term bigger purchases like holidays or cars.
I truly believe rather than charge them board to cover costs, the most important lesson you can teach here is money management. Help them become financially savvy.
They will thank you for it someday, just maybe not now.
This is not going to suit everyone but can be used as a general guide as people will have different ways of doing it along with differing opinions.
Hope that helps.
Make it a great life!
Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth
Mob: 0401 253 729
Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at June 2018. This is an online information blog. It does not imply an offering of securities.