If you’re a parent, I believe that ensuring your children and grandchildren are financially literate by the time they approach adulthood is one of your key roles.
Admittedly, my role as a financial adviser means I’m biased on this issue! But I do think that passing on your financial knowledge to your children and grandchildren can help make them financially aware, and also help them avoid potentially expensive mistakes.
Although financial education is sometimes part of the school curriculum, it’s often sporadic and clearly has to be “vanilla” in its content.
So, you will probably be the main source of your children’s financial knowledge.
A lot comes from leading by example
It’s always been the case that, whatever the activity, children are impressionable and learn by example.
So, if you want yours to grow up with good financial habits, you have to practise what you preach.
My advice would be to think about the good practices you’d like your children to develop and set the right example. For example, ostentatious and profligate spending in front of them may not be a good habit for them to pick up on.
Try and reinforce the positive traits you’d like them to follow, such as saving up for things and being careful with how they manage money.
Here are six key financial lessons you should aim to teach your children.
1. A general awareness of money
By making talking about money in your house a natural activity, you can help your children understand the implications of financial decisions and lead them to ask questions.
Clearly, this may run counter to what you’ve been used to. Often talking about money in front of children has been a bit of a taboo, but by doing so – in a sensible way – you can help raise their awareness.
It also means that they develop the very positive habit of approaching you with questions and any financial concerns they may have as they get older and more independent. This will mean that, rather than bottling up problems and potentially falling into bad habits like excessive unsecured borrowing, they will be comfortable asking you for advice and support.
2. How to manage a regular income
Nothing is better than practical involvement when it comes to learning about money and appreciating its value.
Even a small amount of pocket money each week can get children used to budgeting and saving.
I’ve just started giving my young daughter, Lanah, a weekly allowance of a few pounds – with keeping her bedroom tidy the prerequisite for receiving this.
The choice is then hers in terms of whether she spends it, saves it, or both. Once it’s spent, it’s gone and she learns, in a very simple way, the difference between instant and deferred gratification.
3. Developing a savings habit
Of course, I’ll be giving Lanah every encouragement to save some of her weekly money, and I think it’s a positive habit to reinforce with your own children.
Setting money aside on a regular basis is one of the key financial lessons for children to learn.
Opening a simple savings account on their behalf can start a lifelong habit and stand them in good stead for the future.
Most banks and building societies offer bespoke accounts for children. Many of these come with savings-related giveaways such as a piggy bank or children’s books that can help inform and encourage the savings habit.
4. The power of compounding
Having a savings account for your child set up gives you the opportunity to instil the next important financial lesson – the power of compounding.
Whether Albert Einstein did actually call compounding “the eighth wonder of the world” is open to some debate, but there’s no doubt that seeing how interest, and then interest on that interest, can help their money grow can be a great motivating factor.
At a later date, when you start having conversations about investing, you can apply the compounding lesson again when it comes to dividends.
It’s also prudent to teach them about the other side of the compounding coin – how high rates of interest on borrowing can quickly create problems when it comes to dealing with debt – particularly on credit cards.
5. How bank accounts, and online banking services work
As your children get older and start earning money themselves through a weekend or holiday job, helping them open a bank account can be a useful learning opportunity.
Initially this should be a simple account that provides them will access to money from a cash machine and the ability to make contactless payments.
Such an account will also help them learn about online access and the importance of cybersecurity. Teaching the concept of digital money can be difficult without physically having an account they can manage and use themselves.
6. Understanding the difference between “wants” and “needs”
The sixth, and final, lesson I’d encourage you to teach your children is more theoretical than practical – but no less important.
It’s helping them learn the difference between what they need and what they want.
Making them save for the items they want, such as the latest video game, can help them get a handle on budgeting and planning right from the start. It also encourages them to consider what they actually need over want they’d like.
Understanding that key difference will stand them in good stead as they get older.
Saving and investing for your children
As well as giving them financial lessons, you can also help provide a good financial foundation for your children by saving and investing money for them.
At some stage they’ll require money to deal with many of the usual milestones related to growing up, such as learning to drive and further education. Access to a fund that you’ve put together for them can smooth their transition to independence.
There are many different products to choose from when saving or investing for your children. I’ll make this the subject of a future newsletter article – along with some guidance about the timing of substantial gifts.
In the meantime, if you’d like to find out more about your options now, please get in touch.
You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.