This article was contributed to us by Syfe, an MAS-licensed digital wealth manager.
The year of the Rat is nearly upon us. As adults busy themselves with last-minute preparations, children and teenagers alike are no doubt anticipating their red packet windfall. But beyond being symbols of good luck, red packets or hongbaos can also be a golden opportunity for parents to impart wealth-building lessons.
Here’s a handy guide on how to help your kids make the most of their hongbao windfall.
#1: Save First, Spend Later
While it’s okay for your kids to spend a bit of their hongbao money on the things they want, encourage them to do so prudently by getting them to save a significant portion of their hongbao money before spending the rest. For instance, you can implement a rule that at least 70% of their hongbao money has to be saved first. Bad spending habits tend to be carried into adulthood. It’s important for parents to teach their kids how to spend wisely, and instill in them the habit of saving before spending.
#2: Learning To Budget
Money spent on a video game today cannot be spent on a Justin Bieber concert tomorrow. Money is finite (for most families at least), and parents can guide their kids on how to allocate the rest of their hongbao money for different needs.
For older kids, this can turn into a lesson on budgeting as well. Consider sharing with them how the family budgets each month. Explain how much is set aside for necessities such as food and utilities, short-term goals such as a family vacation, and long-term goals such as their future educational needs. Encourage them to create a budget for their own money the same way. If there’s a concert they want to attend at the end of the year, they should put more money away for that longer-term goal.
#3: The Difference Between Needs And Wants
As you guide your kids on how best to spend their hongbao money, another money management lesson to share would be explaining the difference between needs and wants.
Parents can highlight what qualifies as needs (things you cannot do without) and wants (things that are not absolutely essential but make you happy). Explain to your kids that the amount they budget for their needs should be much larger than the amount for their wants. For example, they can allocate 60% of their hongbao money to needs and 40% to wants.
Read Also: How To Save An Additional $1,000 Without Trying
#4: Set A Good Example
Children learn by watching what the adults around them do. The best way to get the lessons above to stick would be to model them. Parents can let their children see how they distinguish between needs and wants by saying no to something fancy and expensive, or by turning down pricier upgrades.
#5: Grow That Hongbao Money
To help your kids get more from their yearly hongbao haul – and hedge against inflation – consider investing the money on their behalf, rather than leaving all of it in the bank. The hongbao money they’ve put aside to save can be invested in low-cost exchange traded funds (ETFs), along with any other cash gifts they may receive throughout the year. This provides a form of dollar-cost averaging as well where you avoid the risks of mis-timing the market and help your kids take advantage of the long-term market growth.
For simplicity, let’s say you help them invest $1,000 of their hongbao money each year for 18 years. Assuming an average annual return of 7%, their hongbao money would have grown to $36,379 by the time they head off to university! The same amount left in a kids savings account that provides 0.05% annual interest would have netted only $86 after 18 years.
For a fuss-free approach to helping your kids invest their hongbao money, choose Syfe. Creating an account takes only a few minutes and you can help each child invest since multiple investment portfolios can be created within one account. (Once your kid turns 18, they can sign up for their own Syfe account.)
If you are interested to get started on investing with Syfe, DollarsAndSense has an exclusive partnership with Syfe – enjoy 0% management fee for the first $30,000 during the first 6 months after you sign up. Apply here to enjoy the promotion.