Not only is the celebration of Chinese New Year longer than Christmas (15 days versus 12), the best part of this festive season is that your kids are bound to love their gifts – hongbaos, or red packets of money. And unlike gifts of toys and clothes which last at most a few seasons, the value of a hongbao can be stretched for a kid’s lifetime.
For starters, think of how you can take advantage of these red packets to teach your children about money management. At this point, if you haven’t already done a daily tally of the amount received during the festive season, now’s the time. Sit your child down with a simple table indicating $2, $5, $10, $50, $100-dollar or any other denominations on one axis, and on the other axis the number of notes received per quantum. Quiz your child on what $2 can buy, as compared to $50.
When you have totalled up the hongbao money received, ask your child how the money can be best spent. This is a great time to suss out your child’s attitude towards wealth. Very often, most children would want to splurge on toys and candies. This is where you can explain the difference between “short-term” and “long-term” financial goals. Point out how delaying gratification, by not spending the money now and instead, waiting for a birthday to come along and combining the red packets from that occasion for instance, can result in a larger sum of money to provide for more diverse purchase options and alternatives, such as a wider range of toys, or more presents for family at Christmas.
If you had the hongbao money tallied from previous years, this is a good time to show your child the power of accumulated wealth. With the rate of CNY hongbaos ranging anywhere between $2 and $80 according to theasianparent.com, it’s not hard to imagine that most Singaporean Chinese kids receive a sum upwards of $200 every year. While it’s hard to invest one year’s worth of hongbao money alone, it’s a good headstart. You can let several years’ worth of red packets snowball, or top it up with more money from your own pocket to start a fund for junior. And we’re not just talking about putting the money in a bank account. As bank rates vary from 0.01% to 3.25%, why not explore other means of growing the money instead?
Edwin Gan, a financial consultant with Income and father of three, suggests that parents consider putting 20% of their kids’ hongbao money in the bank for liquidity and 80% of it towards insurance plans for better returns. Gan recommends a savings or an endowment plan if the child is already covered for medical, life insurance and critical illnesses, as such defensive savings plans guarantee the principal sum with higher non-guaranteed returns than a typical bank savings account.
According to Gan, a popular education savings plan for those below age 11 is Income’s VivoChild, which distributes guaranteed cash benefits at various milestones of your child’s education, from primary school to tertiary level. For example, if you were to purchase VivoChild for your two-year-old son with a sum assured of $100,000 and a policy term of 20 years which will mature when he is at age 22, you can get $5,000 cash back (5% of sum assured) at various milestones of your child’s life. First, when your son starts primary school at seven. Second, when he gets his Primary Six Leaving Examination results, followed by his ‘O’-levels results, and finally, when he enters National Service. If you were to choose not to receive any cashback benefits and instead accumulate them with Income at a projected yield of 3.7% per annum, you are likely to receive a projected maturity value of $166,649 when your son turns 22. You can choose to pay a $17,295 yearly premium for five or 10 years, or opt to spread the payment throughout the policy term except for the last two years.
Those with smaller budgets need not fret. “There are options such as a 25-year pure endowment plan with a minimum premium of $670 per year, or flexible savings plans, like RevoSave, which offers a minimum premium of $1,202 per year, and coverage for death and total permanent disability. These options are for sums assured of $15,000 each,” Gan said. “Those with a higher risk appetite can consider getting an investment-linked product, like VivaLink, with a monthly premium of $100. It provides coverage for death and total permanent disability with an option to add on for dread disease coverage,” Gan added.
Should you wonder which plan is sufficient for your future financial needs, it is best to sit down with a professional consultant and work backwards on the amount to start saving now. “I typically ask my customers whether they have a preference for placing their child in a local or overseas university, and figure out how much they would need to set aside from there. To assess one’s risk profile, I will ask six questions to find out if one is suited for higher-return but higher-risk plans,” Gan explained.
Gan, who is in his 50s, shared that he used to deposit all his children’s hongbao money in the bank, which offered more favourable interest rates 20 years ago. Now in his 10th
year as an Income adviser, he extols the benefits of flexible savings plans like RevoSave, which allow one to meet short-term financial goals, such as paying for a vacation, without disrupting long-term plans. One can also choose to accumulate the cash benefit at a 3.5% per annum interest rate.
Gan’s colleage Wendy Soong, who is in her 40s and a mother of four, takes a hybrid approach and invests in both investment-linked (VivoLink) and endowment (RevoSave) plans for her children with their hongbao money. The VivoLink plans are meant as lifetime savings for her children while the RevoSave plans are third-party policies and meant to be an inheritance for her children. Investment-linked plans generally yield higher returns than regular insurance savings plans, but the principal sum is not guaranteed.
For Soong, her children are taught that CNY hongbaos should be channelled towards the abovementioned insurance plans, to meet long-term financial goals, while birthday hongbaos can be used to fulfil short-term ones.
For Gan, the fundamental philosophy he has imparted his children is thriftiness. “For example, when my son wanted to buy a Playstation 2 during his teens, I told him that I would only pay 50% of the cost and told him that he had to save up for the balance. This is a method of teaching children to achieve short-term financial goals,” he said.
“Parents have to show their child how saving small amounts gradually can amount to a significant sum of money over the years,” he added. “Short-term goals allow the child to feel the empowerment and satisfaction of buying something themselves and appreciate that accumulation of savings takes time,” Gan added.
With prudence and acumen, you can make those CNY hongbaos grow beyond their actual sums while offering precious life’s lessons to young ones.
By Rachel Chan