This article was published on 21 August 2004. Some information may be out of date.

QYour correspondent commenting, on August 7th, on the young couple trying to choose between savings and spending on the family while they grow up has floored me.

Life is not black and white, and “quality” time with the family does not mean “quantity” of time. I see this issue in two ways:

  • We spend some time when we can interact with the children/family and listen to them express themselves. This does not mean giving them every spare second of the day or taking them constantly for expensive outings. Some of the things you do together can even be chores made into a game!
  • If you do not show some respect for budgeting and careful spending, how are the children ever going to learn to manage their own financial affairs?

I believe that many of our social problems today have been caused because these two issues have not been adequately addressed, and young people grow up thinking that the world owes them a living and they are not prepared to be responsible for themselves (both morally and financially).

The article on Page C27 in the same paper, “The financial facts of life”, educating children, addresses the latter.

AThis could really open a can of worms. Still worms have their merits — just ask gardeners and fishermen/women — so let’s go for it!

Before we get to your main issues, I think you’re too tough on today’s young people. Their sense of responsibility seems to me to be just as sound as ours was — which is to say hugely varied, from one young person to the next.

Most of us became reasonably responsible when we needed to be, and I’ve got faith in the current crop to do the same.

The quality/quantity time issue has been debated far and wide, and I don’t want to get into it here. It’s not what this column is about.

As far as budgeting and careful spending are concerned, I don’t think anyone would disagree that it’s great if parents can be good role models for their children.

The August 7th letter wasn’t about that, though. The writer was advising a young couple who were thinking of borrowing against the equity in their house to make investments.

If all went well, it would be fine. But geared situations are risky. And if the couple did badly, that could affect the way they bring up their children. Stress doesn’t make for harmonious quality or quantity time.

But the most interesting issue in all of this, I think, is how much should parents involve their kids in their financial affairs.

The article you refer to on financial education of children made many excellent suggestions, but there was one that I gagged over. It went like this:

“Lift the money taboo. Positive parenting experts are big on encouraging parents to talk to their kids and involve them in their lives. It’s important that children know the benefits of good money management and the havoc that poor money management, or a shortage of money, can wreak on a family. So why don’t they know how much you earn or what the grocery bill is?

“…By secondary school, (kids) are ready to understand salaries cut down into monthly amounts, so talk to them about your monthly bills. You might even want to discuss what the family would do if you lost one income.”

That might work okay if you are a good money manager and doing well. But what if you’re not?

Should your children lie awake wondering how you’re going to make ends meet, or know that you sometimes spend too much on luxuries? Would their monitoring of your spending be good for parent/child relationships?

Even if you are good with money, do you want them coming home and telling you that you make less than Freddie’s mum or more than Suzie’s dad — who in turn will know how much you make?

Call me old-fashioned, but it feels like too much sharing to me.

QMary, I was just wondering, what do the banks do with all the money in their coffers when we stop buying houses and bonds etc. and leave it with them instead on fixed deposit because the interest is so good?

AIn many ways, money is just another commodity rather like, let’s say, trailers that are towed behind cars.

When you deposit money with a bank, it’s as if you’re letting them use your trailer for a while in exchange for your hiring fee — the interest they pay you.

The bank has a yard full of trailers (deposits). In turn, it hires them out to people who need trailers (mortgages). It charges them a larger hiring fee (mortgage interest) than it gives you, to cover its costs and give it a profit.

What happens if more people want to rent out their trailers to the bank, and fewer people want to hire trailers — which is your scenario?

The yard will get too full. As the need for trailers falls, the bank will pay less to those “depositing” trailers. And, to entice more people to hire trailers it will lower its hiring fee.

The lowering of the deposit rate and the mortgage rate will change the market from your scenario to the opposite — fewer people will want to deposit, and more will want to borrow.

That will continue until there are too few trailers in the yard. The bank will then move back again, raising both deposit rates and mortgage rates.

That’s how many markets work, swinging backwards and forwards around an equilibrium.

With the gap between what the bank pays out and what it receives staying much the same, its profits shouldn’t be affected too much by whether both rates are low or both rates are high.

Before I get deluged with letters from economists saying this is way too simple, I want to acknowledge that. There are all sorts of influences in financial markets, including overseas input.

The main point, though, is that behind whatever else is going on, money responds to the forces of supply and demand. And the price of money is the interest rate.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.