There must be something about the little metal discs and coloured paper. Money is fascinating for children. Especially as they realise that adults need it all the time. That they work every day to buy bread and milk, to pay the rent or bills for the house, the summer holiday or the longed-for toy. Money is all around us and it plays a special role in our lives – consciously or not, and regardless of whether we ant it to or not. This does not go unnoticed by our children.
As they get older, they start having their own experiences with money. Often starting in the seat of a shopping trolley, where they repeatedly ask for and (too often, in their view) are denied sweets. Then they get pocket money, their first holiday job and they realise they will have to save if they want to buy that cool bicycle or the stunt scooter they wish for. As part of their A-level coursework they may study Oscar Wilde, who famously said “when I was young I thought that money was the most important thing in life; now that I am old I know that it is.”
Money – the last taboo
Good financial habits set people up for success. That’s why it’s important to start the conversation with your kids sooner rather than later. There is an astounding contradiction between what people are ready to do to make money and how uninvolved they are when it comes to managing money and investments. That may be due to the fact that many of us were taught little about money management as children. Talking about money is a taboo in many families. You don’t really learn about money at school either. While financial education has been part of the secondary school curriculum in the UK since 2014, a majority of teachers say that it is ineffective¹. When delivering financial education, many schools are held back by insufficient time, negligible resources and school leadership who does not view it as a high priority. How does compound interest work? How risky is it to invest in traded company shares? Is it secure to fully rely on a state or company pension for retirement? Many of us wish we had learnt all of this at school.
Financial education is more important than ever as children are increasingly exposed to the temptations of consumerism. That’s why it makes sense to teach them good money management as early as possible. At school they learn how much change they get from £10 if they buy 2 apples for £3 each. What they don’t learn though is that £3 for an apple is a rip-off, that they could cut the cost of their grocery bill by shopping elsewhere and that a high price is not necessarily a good indicator for a tasty apple. They also don’t learn why you can pay at the cash register by tapping a plastic card. Instead, these lessons are taught by their family.
So how do you teach your kids to manage money responsibly? Our guide might help:
1. Talk to your children about money
Financial education needs to start early, ideally when your kids are preschoolers. As easy as it sounds, one of the basics is to convey the value of coins and notes. What does a ten pound note look like? How many pence are in a pound? And why can’t you pay in pounds if you go on holiday outside the UK?
Kids aged six to eight years are old enough to understand that you earn money by working. At that age, it’s important to explain openly where money comes from: from work, a gift from their grandparents or from a rented property. And where it goes: in rent, shopping, child care. If you manage to convey these concepts, you’re on the right track. It’s also important to be honest with your kids if you’re financially strained.
As they get older, children can be increasingly involved in purchasing decisions. Use the weekly food shop to talk to your kids about finding best value. That shiny and expensive detergent is not necessarily the best one. Children tend to believe everything they see or hear. Most of the time they cannot distinguish between advertising and reality. That’s why it’s important to teach them how advertising works and how they’re being targeted. Once your kid is a bit older, you can involve them in expensive purchases, for example when choosing a new car. This is how they learn to weigh the pros and cons of a purchase.
2. Get your children to manage money
For many children, pocket money is the first taste of financial responsibility. Education experts recommend to provide your kid with a regular, set amount of money, which should not be affected by how well they do their homework or whether they have good grades in maths. Giving money to children if they help with chores is also often counterproductive, as it can become a habit. Children should learn to distinguish which activities are part of the usual duties within a family and which activities justify payment.
A good way for children to learn about money is to let them help with purchases. Give them 5 pounds and ask them to buy fruit for the next day. That can work even for younger children. And no, gummy bears do not count as fruit – that should be clear from the start.
How much pocket money should you be giving your kids? That’s the tough part. It’s important for parents to strike the right balance – regardless of whether they’ve just received a big bonus or not. It’s not helpful to give too much as your child will face jealousy from other kids – conversely, give too little and they may be be laughed at because they have no money.
We recommend to increase the pocket money with age as follows:
Incidentally, switching from a weekly to a monthly allowance at the age of ten is important. At this age, children can learn how to track their expenses over a longer period of time, just like an adult. Leave it to your kid to decide what to buy with their money, as long as it is not harmful. That’s the best way to learn and be confident managing money.
When a child is ten years old, parents should consider opening a children’s bank account in their name. Cashless payments are an important element of financial education. In 30 or 40 years, your kid may well look back at notes and coins just as we nostalgically remember floppy disks.
The next important step to learn more about money is when they get their first holiday job. At that point, children usually know that money does not fall from the sky and that their parents have to work for it. However, for the first time they find out for themselves what that means. Delivering newspapers, filling supermarket shelves, helping out at the ice cream shop: that’s how children learn that if you want to earn money you need to be punctual, reliable and follow instructions.
According to the Children and Young Persons Act, children are not allowed to work. But from the age of 13, a maximum of two hours per day is allowed with the consent of the parents, as long as it’s light work and suitable for children, such as babysitting or delivering newspapers. From the age of 14, children under school leaving age are allowed to work a maximum of 25 hours a week (for 14 and 15 year olds) and 35 hours a week (for 15 and 16 year olds) when they’re not at school. This means they can get their first summer job2.
3. Set savings goals
Earning and managing money is one thing. Being able to save money so as to buy a bicycle or a mobile phone later on is another thing. That too must be learned. Saving can be a boring topic for children and teenagers, especially in the current low interest rate environment. But when it comes to money, patience is an important lesson to learn.
Young children should have their own place to stash their cash and other “treasures” – a box or an old school piggy bank. In addition to this, having their own wallet can help them understand the difference between money for daily expenses and savings.
If your kid’s wishes exceed their financial means – which happens more often than not – then the “Bank of Mum and Dad” can intervene. For example, if your kid wants a mountain bike, you can set a savings goal that is way below the real price of the bike. When they’ve reached that goal, you can top up their savings. However, this should not become a habit – kids are clever. If you regularly top up their budget despite pocket money and a summer job, they will understand it soon enough and use it.
Lavish cash injections by grandparents can also undermine your educational efforts. When it’s not possible to set budgets for grandparents, you can instead negotiate a deal with the child: part of the money goes directly to their account, the other part may only be spent at special occasions.
When your teenage children open their first own bank account, you can discuss the need for proper savings, such as opening a junior ISA so as to go on a world tour at some point. Due to the low interest rate environment, it makes sense to put the money in a Stock & Shares ISA if you want to reach an ambitious savings goal. Moreover, it familiarises your child with financial markets early on – a valuable experience for later. Many children enjoy watching the ups and downs of their money and it allows them to get a sense of what investment risk means. Of course it is also important not to overdo it. Children live in the here-and-now, more than adults. It only makes sense to make real financial plans for their future, such as studying, when they are in their late teens.
4. Include new technology
Since July, notes and coins have been toppled from their position as the UK’s number one payment method. Cards now account for more than half of all retail purchases, according to the British Retail Consortium. 10 years after their introduction to the UK, contactless payments now account for about a third of all card purchases. New payment methods – via smartphone or smartwatch, for example – are likely to intensify this trend. As such it’s important to make technology a part of financial education. Especially as it will play a much bigger role in our children’s lives than in ours.
It starts early. Have you ever been amazed at how quickly your toddler found your holiday photos on your smartphone? Children learn to handle new devices in no time at all. Search for “children” and “money” on your smartphone’s app store. You will find some apps that teach children how to deal with numbers, money and shopping. One of the famous ones is Dr Panda. As an additional measure, such apps can be helpful.
If your kids already have their own smartphone and their own bank account, some apps can also help them keep track of their account balance, which allows them to plan better.
Of course, you also need to set limits with technology. Children’s favourite pastime on phones and tablets is playing games. While many apps for children are free to install, app developers are using clever tactics to get their (and your) money in other ways. Most commonly, free apps are limited very quickly and if you want to unlock virtual resources it happens to cost money. Teens are vulnerable to these techniques. In just few clicks the money has been transferred. That’s why it’s important to control which games your child is playing and to limit payment options, by enabling for example a prepaid credit on the app store.
Prepaid also helps in other life situations: having a Paypal account for online payments or pay as you go phone plans. This is an efficient way to teach teenagers how to handle an existing budget. If they can’t finish watching a video halfway through the month as they’ve used up their data allowance, they will learn how to budget better next time.
Incidentally, when teaching kids about money there’s one thing not to forget: be a role model. If mum and dad like to indulge in shopping sprees, it will be hard to convince their child that they don’t need to have the latest iPhone right after its release date. It may be worthwhile to question your own purchasing decisions from time to time. All in all, money management lessons can be a ‘win-win situation’ for both parents and kids – which happens to be another business term that might be worth explaining to a teenager.
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