4 September 2020
How to teach your kids about money
Financial instruments, investment portfolios and compound interest don’t immediately sound like typical topics of conversation to start with children but teaching them the core principles of money management is something best introduced to their lives as early as possible.
There are a number of simple but effective approaches to raising kids that have a more robust understanding of financial matters: here’s what we think are the most important principles to cover and how to incorporate them into everyday family life.
Use visual aids and props
Children learn well from what they can see, so make the most of the range of physical objects that can help illustrate the basic principles of saving,
A piggy bank is the obvious, traditional tool, whereby the contents from a period of saving are hidden until the bank is full (ie the saving ‘matures’), but it does require being partially forgotten about for a length of time. This might not suit all children, especially younger ones, so something like an old glass jar performs the same role as its farmyard friend while putting the gradually growing fund on display at all times - highlighting the effects of ‘little and often’ in real-time.
Taking the jar approach to the next level - and likely suited to slightly older children - is to use multiple vessels for different financial pots, such as saving, spending and even investing. In this way, a child could choose whether to deposit some or all of a sum of cash, be it pocket money, payment for household errands or birthday donations into their savings jar, or portion off a certain amount into their spending jar for an upcoming event.
Investment could come in the form of giving a small amount of money to parents against the value of the house, for example, yielding interest in line with any increase in property price after a fixed period of a year or two. Alternatively, as a parent you could encourage deposits into the savings jar by pledging a set return rate, further encouraging saving as a habit and installing the principles of putting money away.
The amounts don’t have to be much at all, but the lesson will be a profound one.
Underline the value of patience
Most of us in adulthood understand how much money can be frittered away through random spending that doesn’t sit within a plan or budget, so reinforcing patience and foresight when it comes to money may well provide huge dividends - both financially and behaviourally - later on in a child’s life.
The first strategy to this effect could be to encourage kids to save for something they really want, rather than instantly grabbing those trainers that all their friends have or the first flashing toy they cast eyes on in the shop.
Guiding children along a path where they are forced to sit tight, wait and trust in the process of saving will provide several benefits:
- Increased enjoyment and meaning in the purchase once it takes place. No more ripping the packaging off, playing with the item for a couple of hours and never using it again; possessions will carry more value and in theory be cared for to a greater extent.
- Better recognition of impulse purchases and how they ultimately detract from buying power where it really matters. The message is: ‘If you really want it, you can have it, but it will require some small sacrifices.’
- Showing the value in changing your mind and revising your priorities. Through the process of waiting and saving, your child’s goals may change and something that they felt they couldn’t live without gradually fades into insignificance, replaced by something much more important.
Talk about the cost of things
Oftentimes the main issues surrounding money are that we simply don’t talk about it enough. Incorporating financial decision making and reflection on buying choices into your everyday family conversations will demystify much of the processes behind them and provide your children with a degree of much-needed context.
Openly discussing why you’ve chosen a particular holiday destination off-season will teach children about how costs can fluctuate according to demand. Explaining why you buy supermarket own-brand products over bigger household names will help them understand the concept of perceived value.
Similarly, comparing outgoings for, say, utility bills to cinema tickets, or a grocery shop to some new clothes can help build up a picture of the relative costs of various aspects of life. The important thing is to involve your children in these processes at least some of the time so that they become accustomed to weighing up the options and regularly making sound financial decisions.
Take them to the supermarket, ask them to help weigh up options for purchases for the family home, allow them to carry out card or cash transactions with you; the closer they are to the world of money, the better an overall appreciation they’ll have for it.
Give them budgets to work with
Spending within your means is a skill that surprisingly few people master, even more so in adulthood, so learning to carefully navigate your way through both planned and unexpected costs can mean the difference between good financial health and chronic money worries.
Whether it’s deciding how to spend their own stash of pocket money or kitting them out for school, remind them of strategising their purchases to prioritise the ‘big rocks’, or must-have items, allocating any remaining cash to non-essential smaller buys that might be more gratifying but don’t perform vital roles.
Another way of allowing kids to learn the ropes of budget management is to give them an allocation of money to cover both pocket money and other small regular costs, such as bus fare, lunches and weekend outings. Provided the freedom to manage their own budget doesn’t outweigh the essential costs the money is intended to cover, they should enjoy the sense of responsibility - even if it means making a few mistakes along the way.
Help them learn to trade
It’s not uncommon for children to amass vast quantities of toys, games and the like as they go through each stage of growing up, but if anything this offers an opportunity to explore the ‘selling’ side of buying and selling.
Periodical clearcuts will help them learn a variety of key principles:
- Market value. Perhaps one particular toy is now a more collectable item and has leapt in price, whereas a whole raft of belongings that once cost a considerable amount now hold relatively little by way of desirability. This concept of supply and demand and its effect on potential value goes beyond selling toys and games, permeating many aspects of financial life decisions.
- Consolidating assets. Perhaps your child has their eyes on one particular, more expensive toy but doesn’t have the money saved straight away. Pricing up and selling some of the toys they have grown out of will demonstrate in tangible terms the transfer of value from multiple sources to one cash pot.
- Experience of selling environments, from car boot sales to online platforms such as eBay and Gumtree which also offer scope for some light negotiation on price - another key skill!
Lead by example
Children are information sponges who will soak up the behaviours you follow and the habits you set on a regular basis. When these relate to getting the most out of your budget and making money stretch, you may well be setting your family up for difficult tests later down the line if your own actions fail to follow best practice.
UK households waste 5 million tonnes of food per year, amounting to £15bn in value. Throwing perfectly edible items in the bin because they have exceeded their sell-by or best before dates (which are in fact guidelines for the retailer and not the consumer) will teach your children that food is an almost infinitely disposable commodity.
Similarly, children won’t gain valuable skills in resourcefulness if they grow up seeing their parents frequently disposing of fresh, perfectly edible leftovers instead of using them for more inventive follow-up meals.
Coming home from the shops every weekend with armfuls of impulse-bought clothes will set a precedent for erratic spending as an acceptable standard to aspire to. Instead, be transparent about your own purchasing plans, keep your family in the loop about your savings progress and allow them to share in your satisfaction once you’ve set aside the requisite funds and have finally splashed the cash.
Better still, be an advocate for second hand, upcycled or salvaged items, extolling the pros of reusing what already exists to save money, resources and the environment.
Don’t ignore the act of giving
Despite all this talk of getting the best value at all times and commanding complete control of your finances, sometimes the simplest ideas are the most powerful: the act of giving.
Teaching the value of money to your kids intrinsically involves allowing them to appreciate that there will always be someone less fortunate out there in the world. Using that advantageous position to improve someone else’s life is a mindset that will only benefit them in later life, so introducing acts such as donating to charity, volunteering or raising money for good causes early on in childhood can only be enriching.