Children need to start learning about money from a young age. Whether it’s the budgeting skills we need to cope with the cost-of-living crisis or the long-term planning that helps buy a house and save for retirement, the attitudes we pick up in childhood help shape the decisions we make for the rest of our lives.
Unfortunately, you can’t rely on schools to tell your child what they need to know. Personal finance lessons are not compulsory in primary schools and not all secondary schools teach crucial skills either. So, if you want them to grow up financially savvy, you’ll need to take matters into your own hands.
First, get started early. Children as young as seven can grasp the value of money, how to count it and what it means to earn money and exchange it for goods, says a study for the government’s MoneyHelper service (formerly the Money Advice Service). They can understand that you sometimes have to wait and save for things and that some choices are irreversible, say the authors, who are behavior experts at the University of Cambridge. But they may need to be a little older before they appreciate the difference between luxuries and necessities.
The power of pocket money
The study found that allowing children to make age-appropriate decisions about their money can help them create positive habits. You can start with children as young as three or four, by giving them pocket money and letting them decide how they spend it.
“Once they are old enough not to put it in their mouth, then give them some money,” says Juliette Collier of the charity Campaign for Learning tells The Guardian. “If, for example, they end up wanting to spend that money on sweeties, then make it clear they can’t spend the money on something else. Let them make choices, and experience the consequences.” Introduce the idea of saving and show children that they may need to save their pocket money for a few weeks if they want to make a larger purchase. You could encourage them by offering to pay them a bonus if they save a certain amount.
An introduction to investing
As children get older, expand the topics. Teenagers can learn about investing through their Junior individual savings accounts (Jisas). If they have an investment Jisa, talk to them about what it is invested in and why. From the age of 16 they can make investment decisions about their account, but they can’t withdraw the money until they are 18. This could be a good opportunity to let them make some decisions about their investments.
It’s important to show them all the different assets they can invest in, such as stocks and bonds, as well as ways to do so, such as funds, investment trusts and exchange traded funds (ETFs). Doing this will reduce the chance that their first experience is with cryptocurrencies or other high-risk markets.
Before your child lives away from home for the first time, they need to learn about budgeting. Help them make a list of all their regular incomings and outgoings, such as subscriptions. Show them how much they spend each month then look at how much they have coming in. This is also a good time to discuss saving regular amounts for emergencies. Don’t forget to explain how tax and pensions affect your income. Show them your payslip so they can see how much of a wage is deducted for national insurance, income tax, and pension payments.
Finally, teach your child about debt. Discuss debts you may have, such as credit cards or a mortgage. Show them how the interest rate on debt is much higher than on savings. Explain how not repaying debts on time can affect your credit rating and your ability to borrow in the future. These lessons will hopefully help them avoid problem debts in the future.
Junior Isas: a tax-free fund for your kids