Over the last year, the pandemic has forced millions of children to learn differently. With schools closed much of the teaching has moved online, with parents and grandparents taking on a vital role in children’s education.
Over the last year you’ve probably dusted off your geography textbooks and refreshed your memory on how to multiply fractions. But what about other lessons you could teach your children and grandchildren?
Now families have become so accustomed to video calls, it’s the perfect opportunity to help children to develop other important skills. Here are seven financial lessons you can teach your children and grandchildren.
1. Saving vs spending
The simplest lesson you can teach younger children is about the balance between saving and spending. Understanding this concept feeds into almost all the other lessons below.
If you can’t get to a bank or building society to open an account, set up a “Bank of Mum and Dad” and pay interest if your child or grandchild wants to save money with you. Add coins to their moneybox, or virtual interest through a pocket money app.
2. Basic budgeting
Once a child understands the concept of saving versus spending, they then need to learn how to allocate their money.
Adapting the “50/30/20” budgeting technique can be a good place to start. Under this strategy, 50% of money is allocated to essential purchases, 30% to “wants” and 20% to savings or repaying debt.
If your child or grandchild has three “pots” they can learn to allocate their money:
- “Needs” might be school lunches
- “Wants” might be a video game
- “Savings” might be their rainy-day fund, or if they are saving up for a more expensive item.
3. Why they need a rainy-day fund
Part of the lesson of budgeting and allocating money is to make sure your child has a rainy-day fund.
Children who are responsible for paying unexpected expenses themselves – perhaps they need new school shoes – are more likely to keep track of their money.
You may have to increase the amount of pocket money you give a child if you expect them to pay for additional items such as school bus fares or food. However, it can really help a child to understand the need to have a fund set aside for emergencies – a great lesson to take into later life.
4. Money is earned
At some point you’ve probably told your child or grandchild that “money doesn’t grow on trees!”
Teaching that money is earned, not given, is a hugely important lesson. So, it can pay to have a tariff for jobs around the house, and that children earn pocket money for completing chores.
According to the pocket money app RoosterMoney, top-paying jobs include mowing the lawn, washing the car, cleaning windows, gardening, and cleaning the bathroom.
Even younger children can earn money through making their bed or setting the dinner table.
Whatever you do, make sure pocket money or an allowance is earned.
5. How debt works
Teaching children that debt is more expensive than saving could be the most valuable lesson they ever learn.
Start by teaching the difference between “good debt” and “bad debt”:
- Good debt helps a person to increase their net worth or value. An example might be a mortgage to buy a home, or a student loan to pay for university
- Bad debt is often when you are spending outside your means, for example to buy a new TV or a holiday. While they may be nice to have, they don’t increase your net worth.
If your child wants to borrow money to buy an item, make sure the interest you are charging is higher than that they would earn if they saved it.
And deduct the payments before you give the child their pocket money or allowance, as it shows the knock-on effect of a reduced income on their other activities.
6. The power of compound returns
Albert Einstein once called compound interest “the eighth wonder of the world”.
Teaching a child about the long-term benefits of saving – whether that’s through a pension or ISA – is a valuable lesson.
Start simple. Ask your child or grandchild if they would rather be given £1,000 a day for a month or start with a penny and double it every day for a month. Review it at the end of each week, then ask them if they want to change their answer!
Another good way to show the value of pensions is to start “pound matching” early. Just as contributions to a workplace pension are boosted by both tax relief and employer contributions, matching a child’s savings is a good way to show them the value of this type of saving. It fosters good habits without spoiling them.
7. What their payslip means
When older children start to get part-time jobs, you can help them to understand their payslip. Explaining it to them is also a good way to explore other financial concepts such as National Insurance contributions and tax.
Chat about their first few payslips and discuss:
- Their hourly rate. Does this change if they do overtime – are they paid an enhanced rate?
- Income Tax. What’s the difference between gross and net pay? What is Income Tax for?
- National Insurance contributions. What are these for? How does paying them affect the State Pension they will receive in later life?
- If applicable, what pension contributions they make.
The more a child understands the money they earn and how a salary works, the better the decisions they will make as they get older.
Get in touch
Financial planning as a family can offer huge benefits. So, whether your children or grandchildren are 13 or 30, please get in touch to find out more about how an inter-generational approach could work for you. Email firstname.lastname@example.org or call 01454 416 653.