When it comes to sharing worldly wisdom with your children, there are some skills that shouldn’t be missed. Alongside good manners and road safety, teaching basic financial understanding is a parenting task that will serve your offspring well in later life.
Perhaps you already provide pocket money, and teach the benefits of saving. However, there are other useful money habits you might not have considered. Here are seven skills to help your child become financially independent.
Creating a budget
Show by example. Draw up a budget, detailing your essential outgoings, and other spending. Make it simple and talk this through with your kids. You can easily show what can be cut out to slash costs. This will help them to learn about making difficult financial choices.
You can take your children on a trip to the supermarket, given that food is typically among families’ biggest costs. Give them a sum to spend, and tell them to pick the best-value products, adding up as they go along.
Technology may also help explain how budgeting works. There is a plethora of pocket money apps, such as GoHenry, and Roosterbank, which provide a way for children to keep track of their pocket money and how they save and spend this.
Dividing money into different spending pots is a useful way to learn when you’re young. Draw up a wish list of the things your child wants to do with their money.
Different jars or piggy banks could be used to separate money into ‘saving’, ‘spending’ and ‘giving’. Every time they receive money they should divide it equally between the pots.
The spending money can be used for small, everyday purchases such as sweets or stationery. Money to share could go to charity or a friend’s cause, while any in the saving jar can be put towards expensive purchases. Once they’re older, hopefully their bank accounts may reflect a similar division.
Parents often give their kids mixed messages on spending habits. Perhaps you’ve been openly anxious about meeting mortgage payments one day, but planning a holiday the next. Or said a new car is unaffordable, but happily bought new clothes.
Start including your kids in your financial decision-making to avoid any confusion. You don’t need to go into detail, but talk through your spending choices. You could explain if, for example, you have a holiday savings fund set aside, to make sure the family go away together every year.
The value of experiences
Children tend to focus on their desire stuff, whether that’s the latest iPod or, say, a new toy. Meanwhile, shopping has never been easier, with booming numbers of online retailers and the pressure to consume.
Parents face a challenge to stop their children obsessing over the latest gadgets. So it’s worth spending time explaining that spending on experiences often brings more happiness than spending on things. This will also teach them to set priorities or make difficult choices when spending money.
You could demonstrate this by saying you want to take the family for a day out or weekend away, rather than buy a new iPhone – and share the memories created from this after the event.
The benefit of saving early
Many of us had a piggy bank to store spare pennies when we were kids. But we probably didn’t understand that the sooner you start saving, the more chance it has to grow.
This is a lesson to teach when children are a bit older, perhaps 10 or 11. When they reach teenage years an online compound interest calculator may be used to show that you earn interest on your current savings as well as past interest.
You could create their own example, such as saving towards a car when they’re older. Their savings will earn more money towards their goal, but the cost is avoiding taking cash out of the pot in the meantime. This creates a valuable savings habit for their future.
Where money comes from
Children don’t really understand where money comes from. They assume everyone has money, and all you need to do is ask the cash point for this. It’s worth trying to explain that your money is earned, and doesn’t miraculously appear in your account.
Showing them bank statements once they’re a bit older might be worthwhile. Point out the salary going in, and the outgoings such as essential bills. It may not seem British to talk about how much you earn – but it can be a useful tool to help young children understand the value of working hard to fund a particular lifestyle.
You could even dig out your payslip, and explain what you had to do to find your job. This can help build financial understanding.
The danger of debt
It’s unlikely you can teach a six-year-old the danger of getting into debt. However, when your kids reach their teenage years, they will be able to grasp how debt can spiral out of control.
You can discuss different forms of debt, including loans and credit cards – as well as mortgages, which most of us have to afford a home. That will also help them learn about the consequences of debt. You could allow them to learn through having a credit card with a low limit, and ensure they pay off the balance every month.
Young people often imitate the financial behavior displayed by their family. To teach children about controlling spending, parents have to lead by example to foster good money habits for life.
If you or somebody you know is having trouble with debt, read Rebecca O'Connor's Guide to managing debt.
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