Financial literacy is one of the most important lessons children can learn, yet perversely, this is not something they’re taught at school. Instead, the onus is on you, the parents, to shape your child’s attitude towards money and instil the behaviours that will help them lead a financially stable life.
While many children rely on the bank of mum and dad, they must also be given a certain amount of financial independence so they can learn the value of money and the importance of saving. With credit more readily available than ever before, and the ability to send money never simpler, it’s also essential they learn how credit works and how to calculate the cost of credit before they reach adulthood..
With that in mind, here are some top tips to help your kids understand personal finance issues at different ages…
Let them manage their own money
The first taste of financial independence for most children is receiving weekly or monthly pocket money. Giving your child a regular, consistent sum of money teaches them how to budget and helps them understand that they can only buy what they can afford. You can add an additional element to this lesson by asking them to do chores in return for their pocket money, or giving them the opportunity earn a little extra by doing additional jobs around the house.
Initially, you will have to be prepared to be strong when the children ask for more money after spending their weekly or monthly allowance in the first few days. However, if you’re strict, they’ll soon learn that you’re not going to bail them out if they overspend. Children who turn to their parents for ad-hoc handouts to buy toys, sweets and other treats miss out on this important early lesson.
Help them set savings goals
To help your kids learn to save money at an early age, you can help them set savings goals. It could be for something like a shopping trip or holiday money – something that will motivate them to save. Developing saving behaviour early on will help them out when it comes to getting a mortgage, etc. You can even give them some examples of how to put a budget together, to show them what they need to spend on and what they will need to save in the future. Use an affordability calculator to give an understanding of what a typical mortgage will cost. Recreating real-life situations is a good way to help your kids learn, but it could be a great reminder for you too!
Set the right example
As is the case with so much of their behaviour, when it comes to managing finances, children learn much from their parents. If you’re an impulsive buyer who uses credit to fund purchases you cannot afford, you should expect your children to grow up and do the same. However, if you’re the sort of person who saves, researches purchases carefully and uses credit wisely, these are habits they’re likely to pick up.
If you have made mistakes with money in the past, talking to your children about where you went wrong and why can help to highlight the potential dangers of poor money management. It can also reduce the likelihood that they’ll do the same.
Ask teenagers to research their own purchases
If your teenager needs a new mobile phone or is planning a significant purchase like their first car, ask them to do the research and talk them through their findings. While they may be focussed on getting the latest phone with the best camera, it may not represent the best deal in terms of the overall package. Equally, they may have found a car that looks the part, but have they considered the age, the mileage, the prospective insurance costs and the fuel consumption?
All these elements have a significant impact on the ongoing costs of the purchase so it’s essential they consider them carefully. If you believe there are certain elements of the purchase they have not thought through properly then make sure you explain the potential implications.
Teach them the importance of credit
Very few people are able to live their lives without credit. Teenagers must learn that not all debt is bad. Borrowing money for university or to buy a house is often essential and can represent a wise investment as long as it is researched thoroughly and can be repaid. There are several personal finance options to consider when making significant financial decisions, including borrowing or applying for a personal loan. The key is to find one that offers rates suited to your situation, so it’ll be easier to pay back, and it’s essential to remind your kids of that. Assuming they someday have a business idea they want to fund, Plenti offers low-rate loans that will make it easier for them to pay back. It’s essential to teach your kids about the pros and cons of borrowing so that they can prepare adequately for tomorrow. There’s no such thing as free money, so teenagers must learn that money they borrow now will lead to sacrifices in the future.
They should also be taught how to calculate the cost of credit, the importance of the annual percentage rate (APR) and the costs associated with having a poor credit score. There are also hidden charges that can apply such as early repayment penalties and administration fees that they should be made aware of.
Financial responsibility can spill-over
One of the real benefits of teaching your children the importance of careful money management is that this feeling of responsibility can spill-over into other aspects of their lives. It can make them more conscientious with their studies and even think more carefully about how they spend their free time. It will also prepare them to make high value purchases and manage credit responsibly in the future.
