I opened up saving accounts for my kids when they were born, but to my “bad mum” shame I could have been better at making regular contributions into them. I know that setting your children up to be smart financially is part of the parental remit and looking back there are loads of things I wish I’d known, and certainly wish I’d done. Most of my advice has been about working hard and avoiding debt, rather than educating my kids on how to make their money work really hard for them.
The digital revolution is changing the whole experience of money and how you manage it. Popping into your bank for some friendly advice is a thing of the past. Our children now face a cashless future, with coins and notes predicted to disappear. How that will work remains to be seen, but at the very least it must surely be bad for the employment prospects of the tooth fairy – I’m sure you can’t put bitcoins under a pillow!
Whatever form it comes in – from the physical cash you give them as pocket money to the online vouchers they may get as birthday presents – when you ask the experts, the number-one rule about money remains the same: spend less than you earn.
There's no point in kids being set up, only for the 'bank of Mum and Dad' to be broke as soon as their parents retire
Getting children into good financial habits and helping them understand the value of money from a young age could make a huge difference to them in later life. Explaining how to save, budget and plan for your future is one of the most important jobs we can do, according to chartered financial adviser Lisa Conway-Hughes, who also runs a finance blog, Miss Lolly.
In her work, Conway-Hughes sees many clients whose prime concern is sorting out their finances so they can help their children. “There is no point in kids being set up, only for the ‘bank of Mum and Dad’ to be broke as soon as their parents face retirement,” she says.
“It costs over £230,000 to get a child to 21, according to the latest calculations. You will have already done a lot for them. You have to teach them to take responsibility for themselves, and there are lots of ways of ensuring your children are not scared of managing their financial futures.”
So when should you start? According to Conway-Hughes, who has two children aged two and four, you can get your kids used to understanding the concept of money when they are toddlers. “It mustn’t be a taboo subject,” she says. “One of the things I do to get them money savvy is to play shop with them. It gets them to know how to handle money.
“They are too young to understand that 50p is half of £1 yet, but when they come shopping with me and ask for things, I explain if something is too expensive. It is teaching them delayed gratification. They know they will have to wait for their birthday or Christmas to get some things they want – and that is if they are good.
“I see the age of seven as a pivotal time. By then you can introduce pocket money and get them used to using it to buy sweets or comics. You can also talk to them about savings and how interest works.
“As they get older and the money increases, they can be responsible for buying certain things, such as toiletries or clothes. There are also apps, which are the equivalent of online wallets, where you put money in, they have a card and you can see when and how it is spent. Later you can progress to a regular bank account, but one where you can’t go overdrawn.
“The big change in society is that people’s wants have no boundaries, so it is really important to make sure your kids are clued-up. The best way to learn how to budget is to give them an amount and when it’s gone it’s gone. They don’t get any more pocket money until the following week.
“People can either feel threatened by or embrace managing their money, but when people say: ‘I’m no good with money’, it is a broad sweeping statement that justifies bad behaviour. By the time children are 11-13 years old you can talk matters through in much more detail as they will then be able to understand.”
Conversations about saving as well as spending are vital. With a wealth of junior saving products and ISAs on the market, there are lots of choices to encourage your children to start the habit early of putting money away for the future.
“Try to lead by example when it comes to kids and money,” says Lisa. “You inherit many of your financial beliefs by osmosis.
“Money is related to so many other things in life. You want them to be spending within their means when they grow up, rather than staying awake worrying about how they are going to pay off their debts.”
So what are the key things to consider?
1. Budgeting – learning day-to-day money management
Don’t just tell them, let them see how it is done. No means no if their pocket money is spent – it is the same discipline they’ll need to learn as adults when budgeting within their salaries.
2. The benefits of delayed gratification
Rather than getting everything they want when they want, teach them to save for it. “It puts real value on things if you work hard and save hard to buy them,” Conway-Hughes says.
3. The importance of looking after your interest
By their teens they are able to understand how to make their money work for them. It takes patience, but if children save long term, they can see how it really mounts up. Stress the benefit of compound interest – always reinvesting the interest earned, so the money grows at an ever-increasing rate.
4. Understanding payslips and earnings
When they hit 16 they’re eligible to work full-time and claim the legal minimal wage, so you may need to help them understand their payslips and what those deductions mean. “They have to stand on their own two feet, especially as many of them will have a lot of different jobs in the new ‘gig’ economy. They won’t have open-ended sick pay or big company pensions. They need to know how much of their earnings they get to keep,” says Conway-Hughes.
5. The difference between short-, medium- and long-term savings
Short term – everyone needs a safety net. Accessible cash for emergencies, holidays or for tiding yourself over between jobs.
Medium term – money you aren’t going to spend for the next five to 10 years. They can use investment ISAs or other funds made up of stocks and decide if they want to be cautious, medium or high risk.
Long term – this is their retirement fund. It may be another 70 years until they stop working, but they need to start saving now. You can start retirement funds from when your children are born.
Learn more with Barclays LifeSkills for parents