Financial education for your children

Currently children do not receive any financial education as part of the school curriculum.

In my view, this leaves children unprepared for the realities of adult world and potentially vulnerable to easy access credit that could set their financial futures off to a poor start.

When it comes to discussing money, I recommend encouraging children to talk openly and regularly about it so it’s not seen as a taboo subject.

In this article I discuss what I believe should be the top 6 financial lessons for children – these should be adapted depending on the child’s age and maturity.

1. Set a budget

Budgeting is the starting point for managing personal finance and the earlier the concept can be understood the better. Help your children understand how budgeting works by applying the principle to their pocket money.

For example they could save half, spend a quarter and give a quarter away to charity. This will help them establish, and be used to, the concept of not spending all their money at once.

An alternative is to give your children their pocket money at the beginning of the month so they can manage the money themselves. Of course, it’s more than likely they will run out of money and at this point it should be made clear that once it’s gone, it’s gone! This will encourage them to budget and will reinforce the point that they can’t spend what they don’t have.

If your children are mature enough you could share the family budget with them, explaining how income is allocated between different expenses and how decisions as to what the budget is spent on are made.

2. Encourage delayed gratification

A famous study on delayed gratification was conducted at Stanford University in the 1960s and 70s by Walter Mischel. The study became known as the ‘Stanford Marshmallow Experiment’. In the study, each child was offered a choice between receiving one small reward (a marshmallow) immediately or two small rewards if they waited for a short period of time (approximately 15 minutes). During this 15 minutes the tester left the room and then returned. In follow-up studies, researchers found that the children who waited longer for the two rewards tended to have better life outcomes. These were measured by: SAT scores; educational attainment; body mass index (BMI); and various other life measures.

I believe if we can encourage our children to appreciate the benefits of delayed gratification, it will not only prove an invaluable life tool but will also encourage them to save up for things rather than using expensive credit options (or the bank of Mum and Dad!)

3. Explain about money choices

Help your children understand the difference between ‘needs’ and ‘wants’. Toy manufacturers spend many millions of pounds each year trying to entice children (and their parents) into choosing their brand of toys. There is so much pressure on parents as well as peer pressure between children, for the latest toys, fads and gadgets – and the prevalence of social media has made this pressure even worse. I suggest doing a quiz with your children to cover what sort of things are a ‘need’ and what are a ‘want’. For example, food and groceries are a need and a toy or magazine is a want. This will help them understand how they should prioritise their spending when they’re older.

4. The value of money

We have all heard the phrase ‘money doesn’t grow on trees’. It’s important for children to understand that if they want something special they need to earn the money to buy it.

Encourage your children to do useful jobs in order to earn their pocket money. This will help them understand the value of money because they’re more likely to link work to earning money, giving them a work ethic and helping to make sure they don’t expect to receive money for simply doing nothing. This can also help them understand and put into context why Mum and/or Dad go out to work.

5. Compound growth

Compound growth is a powerful concept in financial planning. In simple terms, it refers to the growth on the growth of an investment or savings over time. The idea is that if an investment is left alone, it will grow exponentially over time. If a child can understand and use this concept from an early age, it will greatly boost their savings and investments later in life. An idea to help your children understand the concept of compound growth is to encourage them to save and then show them how their savings will grow over time. As savings rates are so low at the moment, offer them a small bonus for any money they manage to save rather than spend!

6. Spend on experiences rather than ‘things’

A 2016 study conducted by San Francisco State University found that people who spent money on experiences rather than material things were happier and felt the money was better spent. The thrill and excitement experienced from buying things can fade quickly while the joy and memories of experiences can last a lifetime. Will your child get more happiness from a piece of plastic or a new experience? Try asking your child about the last toy they got; do they still use it and could they spend the money on an experience next time? You may be surprised by their answer! In summary, I believe providing your children with an understanding of budgeting and the importance of saving up for something they really want are crucial skills for them in their later lives. Allowing your children scope to make small financial decisions while they are young and letting them make their financial mistakes at an early age is all part of the learning process. Instilled with the right guidance, your children will learn to respect and understand money and manage debt in a positive way. I believe having this knowledge and awareness when they are young can provide them with a great start to their financial roadmap through adulthood.

In summary, I believe providing your children with an understanding of budgeting and the importance of saving up for something they really want are crucial skills for them in their later lives. Allowing your children scope to make small financial decisions while they are young and letting them make their financial mistakes at an early age is all part of the learning process. Instilled with the right guidance, your children will learn to respect and understand money and manage debt in a positive way. I believe having this knowledge and awareness when they are young can provide them with a great start to their financial roadmap through adulthood.

The value of an investment can go down as well as up. Past performance is not a guide to future performance. Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement. Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority. Foster Denovo Limited is registered in England and Wales Reg No. 05970987. Registered office: Ruxley House, 2 Hamm Moor Lane, Addlestone, Surrey, KT15 2SA.