1 (JAUNTY MUSIC) OK, Harry. So, if you just look down the lens of the camera, and I'm gonna go round the other side and ask you a bunch of questions about money and stuff. Have a bit of a chat about money, yep? Cool. All right. I'm not blinking. I want to find out what kids know about money, because what they think now can affect the rest of their lives. Is money easy to understand or hard? Easy to understand. (LAUGHS) I'll ask you one more time. Is it easy to u` Easy! (LAUGHS) Well, they may think that it's easy, but let's see what happens when we ask them some questions about money. Where do you think money comes from? Um... Tell me about where money comes from. Do you know what a bank is? No. (LAUGHS) How do people make money? I don't know. How does the money get on to the card? Hmm... It... That's a hard question actually. (THEME MUSIC) How can kids understand what money is? After all, it's abstract, a piece of paper or metal with a number on it. Or more likely these days, it's a piece of plastic you swipe through a machine. I want to find out how kids think of money. So, what I want you to do is to choose one of these four faces. If you think about money like money was a person, would money be, like, an angry person? - CHILDREN: No. - Unhelpful person? - Would money be just kinda neutral? Like doesn't really think? - CHILDREN: Yes. Or would money be happy and helpful all the time? SOME CHILDREN: No. OTHER CHILDREN: Yes. Or would money be sad? SOME CHILDREN: No. OTHER CHILDREN: Yes. OK. It's time for the kids to pick the kind of emoji face they think money would have if it was a person. I think money makes people feel happy. If some people have too much money, they` they get greedy. And then they'll make other poor people jealous. Most people have money, but some don't. It's hard to get money and make money because some people don't have jobs. And you can easily lose money like coins out of your pockets and bag. I think it's really helpful for people so that they can buy things that they need. The homeless people really need money so you should share them for them. Sometimes when people see something that they think it might be useful, they can buy it, and sometimes that makes them feel happy, because sometimes when they do their job, they get paid. What's interesting here is that these children are already forming strong opinions about money. Positive or negative, happy or sad, these opinions already exist. If you don't talk to your children about money, they'll just make stuff up. So when's the right time to start talking to kids about money? How much money is there in the entire world? 62! How much does a house cost? A trillion. F` Four trillion. Do you know anyone with ($)4 trillion? You! Yep, definitely (!) Do you get pocket money? Mm, yeah. Mm-hm. What do you like to spend your pocket money on? Hmm,... well, I guess chocolate bars. As they get older, I believe that, um, you know, if they get pocket money it has to be for something that they've done. So, um, I was quite lucky when I was young. I just got pocket money when I asked for it. (LAUGHS) Once we started high school, uh, we got a certain amount every month, and that was to pay for everything. So it was a substantial amount, but we were never to ask for any more money. Ever. When we give our kids pocket money, it's often one of the first times that children have to get their heads around the idea of money, which is why we often get so stressed trying to figure out how to make them better with money. Meet the Mackintosh Family. They have two kids, Bree and Corban, and they have a plan for how to teach them about money. What do you guys do with pocket money? I try to save up. At least as I can. How do you get pocket money? We have to do our chores every week, and on Saturday, we get our pocket money, and we get $5 every week. How did you reach that decision about pocket money? It's just part of being part of the family is that you've got some jobs that you've gotta do. Everyone's gotta help out around the house, so everyone's gotta do their bit. $5 gets paid to all children that live in this house regardless of their age and what they do. What are you hoping to achieve with the pocket money system that you've got? So we talk about that Mummy and Daddy have jobs and that's how we pay for our food and our house and things that we want. And if these guys want things too, then they need to do that with their money. Do you talk about specific things like mortgage and how much you get paid ` that kind of stuff? Yeah, definitely. So, as they've gotten older, we've started to talk about a lot more situations to do with money in the adult world. So, I mean, obviously they see us buying groceries and using our EFTPOS cards, credit cards, things like that. The Mackintoshes are doing a great job talking to their kids about money. If we don't talk about something with kids, then they tend to assume that that thing is bad. And the reason for that is that often the stuff we don't talk about with children is the bad stuff. But the good news is that studies have shown it doesn't matter if you give kids pocket money for chores or if it's unconnected to chores or even if you don't give them any pocket money at all. We pay our kids pocket money for chores, and we've also got a lending system with a particularly steep interest rate. But none of that stuff really matters. What actually matters is talking to your children about the decisions that you make as a family and the specific role that money plays in those decisions. But if money is even more complicated than just pocket money, how do we help kids understand it? It was when my two houses burnt down. I tried to insure them, but I didn't have enough money, and then I just went bankrupt. (THEME MUSIC) 1 So, children, what is money? Well, the Italian economist Augusto Graziani said that to understand money, you have to understand how... 'The way we talk about money is complex and confusing.' ...primarily by barter. Graziani said that a true monetary economy is inconsistent with the presence... 'I think this is how a lot of us feel about financial jargon.' ...in a commodity economy, I would buy Ebony's chicken with half of a sheep. Whereas in a monetary economy, I would give her a paper token. How do you get half a sheep? (CHILDREN GASP) But it doesn't have to be that gruesome or complicated. Teaching kids even the basic stuff about an abstract concept like money is difficult. But then there's the really difficult stuff like investing money. My caveman brain struggles to cope. I've got an experiment which should demonstrate it doesn't have to be that difficult. Now, a large jar of jelly beans, what does that have to do with teaching kids about money, you ask? Well, how many beans do you think are in the jar? Have a guess. I'm going to ask a hundred people and see if anyone gets it right. And at the end, I'll reveal something that frankly will seem like sorcery. Excuse me, would you like to try and guess how many beans we've got in that jar? Um, 1600? How many do you think there are? 150! Do you wanna guess how many beans are in this jar? Like 453. 2500. 2500? 5000? 1000. 1000. 1000, really? There's way more than that. 3247. These guesses seem all over the place, but everybody's helping us build to an important piece of information. A thousand? 577. I reckon over a thousand. 1750. 100? This guy's going to actually try and count them. Nah, I'm smelling it. You're smelling the number of beans? 900 and... 73. Right. Let's see what guessing the number of jelly beans has to do with kids and money. But first, I actually have to find out how many jelly beans are in the container. 1790... four. We asked a hundred people how many jelly beans were in the jar. So I'm going to add up all the guesses and divide it by 100 to get the average. Whoa. OK, this is spooky. The average of our 100 guesses was 1805, and the actual number of beans in the jar was 1794. So the average of our guesses is 11 beans off the actual number of beans in the jar. And that's the wisdom of the crowd. Now, you're never going to get rich counting jelly beans. Though, the power of averages is being used by one of the world's richest men. Warren Buffett has a million-dollar bet with some bright young Wall Street stockbrokers. He said that he'd earn more money over a 10-year period by investing in the average of the stock market than they would by playing the market and buying and selling and all that crazy hedge fund stuff. And what's happened? He's earned three times more money than they have. So don't get lost in complexity. You don't have to be an expert to help your kids. Betting on the power of the average, like Warren Buffett, means you can be a winner. Is investing complicated,... scary? It really shouldn't be. I think often people associate it with a lot of scary-sounding jargon and financial lingo, and it isn't. It isn't that complicated. It can be really, really simple if you make it. What's the secret to, kind of, saving and investing? I don't think there's any magic secret, but starting early does help. So if you can get your kids into that habit early on, then that's a really great thing to do. And then looking at things, like, putting aside $10 or $20 a week if you can and doing that on a regular basis, and that's where the real beauty of compound interest kicks in. A lot's been said about compound interest, and that's because it's a very powerful concept. It's impossible to confirm it, but Einstein reportedly said, 'Compound interest 'is the eighth wonder of the world. He who understands it, earns it; and he who doesn't, pays it.' Never has a truer word been said or possibly made up. To demonstrate the magic of compound interest, we're going to fill these two fish tanks with water. The tank on the left represents Sophia's retirement fund, and the one on the right represents Sophia's mum Lara's retirement savings. Sophia is going to save around $10 a week, or $500 per year, and I'm going to add interest of 8% every year. Year one, first interest payment. Over on the right, Sophia's mum hasn't started saving yet. Let's see how it works out. Sophia is being very consistent. $10 a week every week, year in, year out. Year four. (WATER FALLING) So, this is year 10. And for the first time, the amount of interest that Sophia is earning each year is greater than the amount that she's putting in. Her $500-a-year savings is beginning to be drowned out by the compound interest. We're now at year 20, and this is where the magic of compound interest really starts to kick in because Sophia is going to make her last payment, and from now on interest is going to do all of the work. So all up, Sophia saved $10,000 of her own money over 20 years. Compound interest increases more and more and more for every year you've been saving. So, this is year 34. Sophia's account has basically been increasing the whole time because of compound interest, and Lara has decided that she needs to start saving. First interest payment. Because Lara started a bit later, she's decided to try and save six times as much as her daughter saved every year, putting in $60 a week, or $3000 a year. So at year 65 who will have the most money? Sophia, who stopped saving when she was 20, or Lara, who saved for 30 years but only after starting when she was 35? So we're now at year 57. Sophia, she stopped putting money into here 37 years ago, but through the power of compound interest, there is now $426,000 in her account,... ...and compound interest is still working. The results are in. Sophia saved just $10 a week until she was 20 and that turned into almost $800,000 by the time she was 65. And Lara started saving $60 a week at age 30 but only gets half of what Sophia gets when she turns 65. Compound interest is interest earned on interest. You don't feel the impact of it straightaway. Like all good things, it takes time. But that's why it works so well for kids, because they've got all the time in the world. Next, we're going to try and figure out how and why kids want to spend and save their money. Oh! That was amazing! 1 Cos you maybe have had a little bit of a first-hand experience with bankruptcy. What happened? Tell me about it. It was when my two houses burnt down. I tried to insure them, but I didn't have enough money, and I just insured them, and then I just went bankrupt. You're just on your own with nothing? Kendall Flutey has come up with a piece of software called Banker. Its aim is to give kids some real-life financial literacy. The online tool creates a world where kids can own houses and save money and do anything that happens in the real world. Do you think it'll ever happen again or are you going to be`? Probably happen again. You'll probably go bankrupt again?! (LAUGHS) Probably. She came up with the idea after talking to her younger brother. I'm an ex-accountant turned software developer. When I was home, he just asked me this question ` Hey, Kendall, if I'm hiring someone, should I bring them on as an employee or a contractor? And that kind of just blew my mind. I didn't expect this from that 11` 12-year-old boy. And I felt a bit guilty that I'd never had these, kind of, financial conversations with him. Turned out that his teacher had been teaching him these sort of life skills in class. So you've got 11 properties? Yeah. And do you have a mortgage on those? Uh, not any more. Not any more? So you've paid off mortgage on 11 properties? Yeah. It's a sandbox environment for kids to confidently explore money. Cos we kinda just let kids out into the world at 18, give them a $50,000 student loan and say, 'You'll probably be OK.' But we never actually have those conversations or let them explore money and experience it first-hand before that point. If you look after your house, if you look after your rental property, and it's in really good condition and it's really nice to live in, what's going to happen to your rent? From your point of view, like, what are the kids getting out of doing Banker? I don't think, generally, there's a good understanding of money and what it's about. Kids are given money just to go and buy things. There's no real understanding of the value and the purpose. With this it's giving real purpose and real meaning. If the kids are getting some understanding of financial literacy, then hopefully they're going to start from this age putting some money aside, start thinking about, 'Oh, I can invest in property,' or 'I can earn interest on my money by just putting a little bit here.' And they're actually talking about things like retirement. Kids can get over that weirdness of talking about money, that has to be a good thing. Absolutely. If someone's more confident, then that student's going to go out and thrive in the economy, and the economy as a whole will thrive, because if one person's better, we're actually all gonna prosper. This financial literacy could lead to one of the most important aspects of a child's success with money, and that's self-control. One of the key findings of a study that's been running at the University of Otago for the last 40 years where they followed over a thousand babies born between 1971 and 1972 is that increased self-control predicts all kinds of positive outcomes in a child's life. Eh? (LAUGHS) All you have to do is stand still. Ready? Three` 'Essentially, the more self-control you have, the less likely you are to get into trouble with money. You're going to save better, and you're not going to rack up big credit card bills and end up with bad credit history. And if your kid's not good at standing still, don't worry. It doesn't mean they're going to go bankrupt. The more you get them to practise self-control in all kinds of situations, the better off they'll be. The good news is that self-control isn't like eye colour. It's not fixed at birth. It's a skill that you can develop. So what does self-control look like for kids? This week, The Nudge Unit, my hand-picked team, are going to try and tempt a bunch of kids into spending money. (LAUGHS) All we need for this experiment is a bunch of happy kids looking for some fun. Hello! CHILDREN: Hi! So who thinks it's good to plan for the future? OK. But life's pretty hard, right? Cos it puts a lot of temptations in the way. This is Temptation Street. Now, down this street are all kinds of amazing wonders. I'm gonna give you all five $1 coins. And you can walk down Temptation Street. And there's a lot of cool stuff there. There's a bouncy castle ` $1. Some delicious popcorn ` $1. Just pass that, $1 for a balloon animal. And then just after that, for $1 you can throw water balloons at Ben, your teacher. I know! (CHILDREN LAUGHS) Here's the catch. See that desk in the far end with the little silver piggy bank on it? For every $1 coin that you put into that silver piggy bank, we will give you $2 that you get to keep. CHILDREN: Ooh! Yeah, so you get to keep it. OK, here we go. Can these kids use self-control for a financial reward or will the temptations be just too tempting? Off you go. Are you sure you want to? Yeah. You don't want to save your money? Straight away, half the kids can't resist the bouncy castle. And next, the buttery popcorn is also proving irresistible. But some of the kids didn't bounce and turned down the popcorn. Doubling their money was keeping them focused. Although, it's pretty hard to resist spending $1 to soak your teacher. At the finish line, the kids put in all their unspent money, and it was time for me to pay out. For every $1 they put in, they got $2 back. So how much self-control did we see? Everyone manage to save something? CHILDREN: Yeah. Everybody have fun? CHILDREN: Yeah. Now we pay out, which is the good time, right? So, you guys saved $1, so you get $2. You made a dollar, and you had fun. That's pretty good. So you guys all managed to save 2? Popcorns and balloons. $4. $3. Good going. So you guys all did 4, so that is $8. Thank you. What tempted you? The water balloon. And what tempted y`? Oh. (LAUGHS) And so, you guys managed to resist everything, and you saved the whole $5 coins, so you all get $10. What did you say to yourself to make yourself not spend any money at all? I spent lots of money in the past, and I just regretted it, so I just wanted to save it. And so, how did you get through the whole thing without spending any money on anything? It was very tempting. I was` I stopped at the bouncy castle for a second. But, yeah, I just thought more money as well. And how did you stop yourself from spending any money at all? I was thinking at the beginning, 'I want to do the water balloon and the bouncy castle,' but I thought these are only, like, opportunities that you can only get for, like, five minutes. And then it's, like, over after that. Studies show that kids with self-control, those that save their money, will do well later in life. But, it's also about remembering to enjoy the moment ` jump on that bouncy castle, eat popcorn and throw water balloons at your teacher. Self-control is about balance. Teach your kids to save for the future but don't forget to just let kids be kids. (CHILDREN LAUGHS) None of us are perfect. Especially, when it comes to money. But you don't have to be perfect to help your kids be better with money. Just talking to them about this stuff, about your actual money and your bills and how you manage it all, helps them to understand how money works in the real world. And if you introduce them to the bewildering magic of compound interest, you will literally change their lives.