Diana Clement: Money or the bag of goodies

Kids and Christmas go together like a horse and cart. But if you want Santa to bring more than short-term happiness from toys and confectionery, then consider giving money as a gift. It could give your little ones a financial head start to their adult lives.

My own mother makes an annual pilgrimage to the $2 Shop to buy the grandchildren's Christmas presents. The other thing she gives them is a cheque, which is duly banked into their ASB accounts. Like most parents I hope that their rising bank balances will help them learn the value of saving before the credit industry reaches its tentacles their way.

Giving kids money at Christmas doesn't mean they will save it. Even so, says family therapist and author Diane Levy, they'll be learning valuable financial lessons. "Whether you give your child 50c to spend at the dairy on sweets or $15 to spend in The Warehouse on a birthday present, they will have to confront all the difficult issues around what they want and what they can afford, what they are going to choose and what that will mean they won't be able to choose.

"These are difficult decisions for many children, but they are good practice for them."

Like adults, some children are spenders and some are savers. Levy says her children loved having money to count and collect.

It would seem, however, from research in the Britain by Abbey, a bank, that kids like financial presents more than one would imagine.

The research found that:

* 79 per cent of children receive money for Christmas.
* Half of 16-year-olds prefer to receive money than gifts for Christmas.
* 30 per cent of children put money into an account after Christmas.
* 32 per cent said they preferred money as a gift over presents. Of those who received money, 46 per cent put at least half in their bank account. One per cent deposited all of it and only 24 per cent spent the lot.
* Finally, 75 per cent said they hardly ever or never took money out of their bank accounts to spend.

Christmas and birthday money can't be divorced from pocket money when it comes to learning the financial facts of life.

Opinions vary on how much pocket money children should receive, at what age it should start and how the money should be split.

In our family, we go for the $1 a year of age rule and ask them to put one coin in a piggy bank and spend the other.

My children, aged three and four, learned quickly that it was no use pestering me to buy stickers, swords and other paraphernalia at the $2 Shop if they'd already spent that week's pocket money.

At the moment, my preschoolers are just getting used to the spending aspect of pocket money. The money in their piggy banks mounts up slowly and soon, for example, my daughter will have enough to buy the Doodle Bear (as advertised on TV!) she has been coveting. When the amounts get larger, my children will be expected to split the money three ways: spending, short-term saving and long-term saving.

While children of this age understand that money buys things and it can be saved, concepts related to money are a little hazy.

World War III nearly broke out one Saturday when, short of gold coins, I gave my son a $5 note, telling him we'd get change later. It transpired that anything short of gold coins wasn't good enough for him and the paper money was thrown back at me in a fit of rage.

The key developmental stages for kids and money, says Lyn Morris, national director of Enterprise New Zealand Trust, are understanding that:

* Money buys things - preschool.
* Spending requires choice - early primary.
* Different payment methods - late primary.
* Payments can be delayed - intermediate.
* Managing credit impacts on your future - secondary.

Once the money begins to mount up, it's time to think of better long-term investments than bank deposits, which will be eroded by inflation, and Bonus Bonds that don't cut it as a long-term investment.

The power of compound interest means that small sums invested regularly can grow to significant sums in the long run - giving children a step up into the property market or university.

Financial planner Philip Holland, of Harmer Parr in Tauranga, delights in watching his six-year-old's bank balance steadily rising. "The school banking system has started up again in Grace's school and she banks her $1.25 or $2 each week and part of her Christmas money."

Holland says when the money mounts up a little more, he will help her buy shares in a company that she can identify with such as Pumpkin Patch or the Port of Tauranga.

As his children get older, Holland plans to start them investing in the Fisher Fledgling Fund - which is aimed at young investors.

"I describe it as the training wheels fund. It has a low minimum investment of $50 a month," says Holland.

Last year, Harmer Parr worked with a number of grandparents and grandchildren setting up investment "contracts" for youngsters and grandparents to sign.

The grandparents agreed to invest Christmas money each year into the Fisher Fledgling Fund. The children were contracted to invest 10 per cent of income from their first real job and after two years of doing this, the entire fund would become theirs.

An alternative to the stock market is collecting in the expectation of making a capital gain. Kids love to collect and if they start storing away treasures now, they could be worth a sizeable sum in the future.

The trick really is to second-guess what is going to become collectable in 30 or 40 years' time and stockpile it now.

In the 70s and 80s, thousands of Fun Ho toys found their way to landfills around the country. Yet even beaten-up Fun Ho toys can command big sums of money on auction websites such as Trade Me and Zillion. When I looked this week there were 122 of them for sale at prices ranging up to $400.