“Teaching proper money management is possibly one of the best gifts you can give your children. It could save them untold stress later on in life,” says Karen Barrett, chief executive of financial advice website Unbiased.co.uk.
Many of today’s young start their working life saddled with university debt reaching into the tens of thousands. Their hopes of getting on the property ladder seem dimmer, with home ownership currently at its lowest level in 30 years. Paying off student debt and putting aside money for a deposit is also proving a distraction from saving for retirement. Increasingly, the onus will be on fending for oneself after 65.
Many youngsters will end up woefully ill-prepared to face all this. Parents can help by harnessing their children’s fascination with money and explaining basics – rather than leaving them to figure it all out in adulthood.
BE A GOOD EXAMPLE
Children unconsciously model the behaviour of their parents, so a sensible attitude to money in the home will likely rub off. “One of the most powerful ways of teaching children how to manage money is to ensure you manage your family’s finances and budget,” says Barrett. “Talk through your thought process as children learn best by copying those around them.”
CAN’T AFFORD IT, CAN’T HAVE IT
Delayed gratification is an essential part of saving money. It’s a concept that can be transferred from self-control around computer games and chocolates onto money. “I’ve introduced the ideas of savings and interest to my children. If they don’t eat their sweet right away, they get another one later,” says Barrett.
Holding back from buying them things, however much they rant, will prove valuable later on. “Many parents automatically buy their children the latest gadgets, games and designer clothes and the child has to do nothing to contribute to this. As a result the child just assumes they can have whatever they want, when they want it,” says Patrick Connolly of financial advisers Chase de Vere.
GIVE THEM RESPONSIBILITY
Many parents have mixed feelings about pocket money but supporters say it’s a form of early budgeting which teaches the value of money. “In my experience this naturally leads to children realising the need to save up for big purchases, and learning the hard way if they don’t have enough money for something that they’d like to do,” says Claire Walsh of financial advice firm Aspect 8.
She suggests children aged five to 10 be responsible for choosing which toys, games or apps to spend pocket money on, while teenagers can budget for spending on clothing and hobbies.
KEEP YOUR RESOLVE
It’s important to remember, if a parent is to walk this path they need to commit for the long haul.
“Be firm about your child’s cashflow. Money won’t be a motivator and they won’t learn those key lessons, if they know they can get more treats just by pleading,” says Barrett.
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Sacrifice can also come in the form of chores, extra studying, achievement at hobbies or following through on other behaviours parents want to encourage.
“Rather than offering a single big prize for passing an exam, ongoing smaller ‘wages’ for studying are more likely to have the desired effect. This shows your child the direct link between their ‘bank balance’ and how hard they work, providing regular positive feedback,” says Barrett.
SHOW THEM A BANK ACCOUNT
“Explain how the bank pays you interest as a thank you for keeping your money with them. Research different bank accounts online to show where you can get the best rate and explain why fixed rate accounts pay more,” says Walsh.
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Junior Isas are still overlooked by many parents, says Sean Irwin of financial advisers DFP Wealth Management. But it’s surprising how readily children can understand the concept of tax-free investing: that the taxman won’t take money from clever people who save it.
“A friend of mine set up Junior Isas for his children, who are seven and nine. He involves them in the stock selection and they read fund descriptions together. This can open up really interesting conversations about all sorts of things from geography to politics, and thinking how other parts of the world are different to Britain,” says Walsh.
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The biggest issue affecting many young adults is the amount of debt they get into, which can then become very difficult to repay. Parents can help by differentiating essential debt – such as the mortgage and university costs – from frivolous spending, and not openly rack up unnecessary credit.
“Parents should encourage an attitude of not buying treats or luxuries unless they can afford them. They shouldn’t take out debt to pay for holidays, new gadgets or other non-essential items,” says Connolly.
Children’s vocal comparisons of their lives with their friend’s holidays /gadgets/family car could be seized upon as a chance to teach some hard truths. Connolly says: “It’s an opportunity to underline that people can’t just automatically have everything they want and more expensive items often need to be saved up for, or sometimes can’t be afforded at all.”
Once children start working and have more money, it may be useful to teach them the 70/30 rule – save a third, spend two thirds.
“It’s best to start when the numbers are small as it’s far easier to save £3 in every £10, than it is to save £300 in £1,000,” says Alan Chan of IFS Wealth & Pensions.“Hopefully, as the numbers become larger, the principle will be second nature.”