These days, it is essential that young people are taught practical lessons about finance. This June’s My Money Week could be the perfect time to ensure your children and grandchildren learn the vital lessons they need to manage their money as adults.
It’s important that young people learn about finance, as the UK has a high percentage of people who may leave school without the money management skills they need to succeed in the real world. Furthermore, few people even get taught about finance – research from Money Helper shows that only two-fifths of children are taught about money in school.
So, in the spirit of My Money Week, here are 10 great practical lessons you can teach your children or grandchildren about money.
1. Spending and saving is a balancing act
As a child, spending is likely at the forefront of your mind far more than saving. There is always a new toy or game that needs to be purchased! So, it’s important to teach your children how to balance saving alongside spending.
Teaching your children about saving won’t just give them good financial habits. Saving reinforces planning and goal-setting behaviour, and could help younger people learn about discipline and delayed gratification.
While you may be able to teach older children the importance of saving for the future, younger children may benefit more from being given a short-term goal they should save towards. This could be in a classic piggybank, or a more modern method could be with a debit card for kids.
2. The benefits of earning interest
As well as saving, you can also teach children about the importance of generating income from their savings through interest.
A good place to start could be by paying your children interest on any money they save in their piggybanks. For example, you could agree with them that for every £40 they save, you will give them an extra £10 on top, and that this reward is interest.
Teaching children about interest has more benefits than just the financial side too. By showing them the worth of waiting to generate a return from their savings, you could deter the rush of instant gratification that comes with making a new purchase.
3. How mortgages work
When it comes to complex financial issues, mortgages are probably up there as one of the trickiest to understand. So, what better way to smooth the process when your children eventually get their own mortgage, than teaching them about mortgages when they’re younger?
A great way to teach your kids about mortgages that doesn’t involve poring over complicated financial documents could be with a game of Monopoly.
If they run out of money, you can allow them to mortgage any properties they own for half the original cost, with an interest rate of 10%. Until your child pays of the mortgage on their Monopoly property, they can’t earn any money from it.
This could also tie in with lessons about debt and credit – by reinforcing healthy debt habits from an early age, your children could avoid destroying their credit score when they first leave home.
4. The different ways they can earn money
If you’ve been busy teaching your children the importance of saving, you need to give them opportunities to earn money in the first place so they can make their own decisions.
While regular pocket money could be the answer to this, a far better route could be giving your children jobs to complete for money. By showing them that the work they put in is valued, your children could quickly learn that putting in the effort results in getting paid.
5. Treat debt with apprehension
As was previously mentioned, you don’t want your children to rack up debt and ruin their credit rating when they first leave home. This is why you should ideally teach your children the importance of avoiding debt when possible, or if it’s unavoidable, paying it back in a timely manner.
For example, if your children have asked to borrow some money for a purchase, you could charge them interest at regular payments to show them how debt works in the real world.
Of course, not all debt is to be avoided, and this should be reflected in your lessons. You instead want them to realise that to afford certain things, such as a house or an education, debt must be taken out.
The vital part is teaching them not to get in debt that is not within their means, and that any debts they do accrue should be paid back accordingly.
6. The power of compound interest
Generally speaking, the earlier your child understands interest and starts saving, the more savings they will in turn accrue over the years.
You could try and explain compound interest in black and white terms. Or, you could try the marshmallow experiment. This involves giving a young one a marshmallow and telling them that the longer they resist eating it, the more sweets they will get in turn.
It only has to be one extra sweet a day, but this could increase your child’s understanding of compound interest and the rewards that saving brings.
Of course, if the child is older, you can always swap out the marshmallows for money, as this may motivate them to save more.
7. What a payslip means
When an older child starts working part-time, you can sit with them and talk through their payslip with them. Make sure you discuss all of the payments and contributions they’ve made, such as tax or National Insurance, and inform them about what this is used for.
You should ideally aim to discuss everything from:
- Their hourly rate, and whether this changes if they do overtime
- Income Tax contributions, when they’re made and what the money is used for
- National Insurance and how paying this will affect their State Pension in later life
- Any other pension contributions they may make.
Or, if your child hasn’t started working yet and you still want to help them get a leg up with understanding payslips, you can always show them one of yours and talk through it with them. The more a child understands how salaries work, the better the decisions they will make when they’re older.
8. The best ways to budget their money
As mentioned previously in this article, children will be far more concerned with spending rather than saving. It is vital, however, that they understand the importance of proper budgeting.
A good way of teaching them about budgeting could be with the jam jar method. This involves giving children pocket money, then have them allocate their money in jam jars for specific purposes.
For example, they could have a jam jar for smaller purchases, such as sweets and toys, them another jar for larger purchases such as video games. They may also have a third “charity” or “gifts” jam jar.
Your kids are the ones that decide how their money is allocated between jam jars. It can be a useful visual aide that can enforce positive budgeting habits.
9. Understanding that virtual money is still money
In this day and age, virtual banking is as integral, if not more so, than normal banking. In fact, the more things advance, the more it seems that virtual banking will replace typical banking altogether.
A great way of doing this is with a child or teen debit account. Instead of giving a child physical pocket money, you could instead transfer it all into their own debit accounts. This will show them how to budget and save with a virtual banking account, rather than just saving it all in a piggybank.
GoHenry is potentially the perfect type of debit account to give your kids. As well as the debit card, GoHenry includes helpful learning resources your children can use to learn about saving and budgeting, with controls that can be completely adjusted by parents.
10. Why it’s critical to start building an emergency fund
Having an emergency fund is the key to being prepared for any sort of financial emergency that may arise.
You may want to talk to your children about real-world situations that could arise – you could explain to them, for example, that if your car broke down and you couldn’t afford repairs, they wouldn’t be able to get a lift to school.
Then, you might want to think about getting your child to start building an emergency fund. Showing them the importance of having money they can fall back on – for example, if a games console needs to be repaired – can be a great lesson to learn.
Get in touch
If you would like to discuss more financial lessons you should be passing on to your next of kin, email enquire@london-money.co.uk or call (0207) 808 4120 to find out more.