How to Teach Your Children to be Financially Literate 

It’s up to Parents to Nurture their Children’s Financial Awareness 

It’s strange really that whilst our society measures children’s attainment largely by examination results, their formal education seemingly teaches them little about the practicalities of life including how to manage money. Now I accept that this statement is sweeping and that there will be some schools which do try to impart financial knowledge in one of the General PHSE type-of-lesson slots, but generally it’s down to parents and life experience to instil good financial habits in the young – and those instructing of course may not be in the best of financial health themselves. But on the basis that you don’t have to be an Olympic athlete to coach athletics let’s have a go at seeing how we might try to encourage our children to become financially astute. 

Set an Example to Follow 

Children learn by immersion and observation and will very often copy their parents in their savings and spending habits. Learning the value of money and how to negotiate financial hurdles is an essential life skill and it’s never too young to start – you know you might have a problem if your 5-year-old asks for a credit card for Christmas!

As children mature, their attitude and capability to grasp concepts changes so we can break down a pro-active approach to teaching them the value of money into four age-appropriate stages. In each stage we will also examine how to invest for them and increasingly how to help them make their own financial decisions to help them manage their money.

The Power of The Tooth Fairy – for many this is where the financial journey starts 

Before we launch into the detail, the power of money, even on the young is clearly illustrated by the tand-fe – the ‘tooth-fee’. This is a child’s first proper financial transaction. The tradition dates back to the Norse in the 10th Century, but it has been adopted in some form by many cultures. Parents give a fee to children, under the guise of the Tooth Fairy, when they lose a tooth, to make it a more comfortable experience.

Having your teeth fall out could potentially be a very frightening experience, the reward does not eliminate the pain, but the thought of receiving some money inspires children – and of course it is their teeth, so their money. And the stakes are increasingly high, a whopping 99% increase with each generation, 27% of children now get £1 for each tooth, for 23% it’s £2, only 14% receive under £1.  9% of children pocket between £10 and £20 a tooth and for a lucky 2% it’s over £20. Amazingly in the UK only 8% of children never receive a visit from the Tooth Fairy – that is some market penetration – so the Tooth Fairy is more prevalent than Facebook!

1. THE EARLY YEARS – It’s never too young to start learning about money 

Children love ‘stuff’. They like new things and variety, and the danger is that they get whatever they want, and the endorphin kick comes just from having something new rather than what the object is. How to overcome this temptation of too much:

• Encourage children to play with household objects as well as toys, accept second hand toys and encourage them to share. This will de-materialise their habits which is a useful lesson to learn at an early age.
• Let them play with actual money, or realistic toy money – explain the values and shapes and play shop games to show them how money works. 
• Harness the internet – there are some very good pre and early school game apps that also link money with early maths learning (e.g. The Maths Factor (by Carol Vorderman), Maths Seeds – a part of Reading Eggs and  Khan Academy)  children of course love screen time and this can have an educational value dressed up as fun. 
• Take them shopping, but don’t let them pile everything they want into the trolley; the amount of the weekly shop can rocket if you take a child with you as they are tempted by everything. Taking a list and asking them to help find things and tick things off can bring some focus and of course they love those little tokens you get at some supermarkets with which you choose to donate to a charity. 
• Explain where their presents come from and even introduce the concept of Father Christmas having to budget too, but don’t overcomplicate things.  This approach did backfire on a friend of mine whose daughter then insisted that all she wanted for Christmas was money to be left out for Father Christmas so that he had enough to make toys for other ‘poor’ children.

What are the Five Best Investments for Pre-School Children?

Obviously, pre-schoolers are too young to understand the concept of investment, but this doesn’t mean that it cannot happen on their behalf, especially if there are generous relatives in the background. Little and often is a good mantra to apply to these early savings.

1. Bank and Building Society Savings Accounts – these are a good place to start, with instant access and no tax on interest up to the first £100. After that, one of the parents has to pay tax if they have exceeded their personal savings allowance. 

2. Junior ISAs – can be held in cash with no tax on interest earnt, and/or in a stocks and shares ISA with no tax payable on the capital gains. The child can gradually be involved and can take control at 16 but can’t withdraw money until the age of 18. Currently the total annual amount invested cannot exceed £9000. Restricted to contributions by parents and grandparents.  

3. Premium Bonds – a traditional present that has Government backing and can be bought in units from £25 up to the limit of £50,000. There is no interest paid, but there is the thrill of possibly winning one of the tax-free monthly prizes. 

4. Trusts -it is possible to put assets into trusts and to nominate a trustee to manage them for the future benefit of the child. This could be money, property and land, or other assets. 

5. Junior SIPP – it might seem extremely early to be considering your child’s pension, but your best investment is always the first £1 that you put into one. Anyone can contribute, this is not restricted to investment only by grandparents and parents. Currently contributions of up to £2880 can be made each year in addition to 20% tax relief that is automatically applied totalling £3600. These cannot be accessed until the age of 55.

2. STARTING SCHOOL – begin the saving habit

Once children start school, it is a good time to begin their financial education in earnest, maybe with regular pocket money and plenty of guidance on how much to spend and how much to save.

• Some schools allow children to take ‘snack money’ to purchase healthy food mid-morning. This allows children to get used to handling money in a real situation, but be prepared for the negative impact on the then uneaten packed lunch as the child maxes out on four slices of break-time toast at 40p a slice , and the wily ones soon cotton on that they can secretly save their snack money for other more exciting bounty – like the fidget vending machine at the sports centre – it’s all part of the learning curve. 
• From around the age of six, it is as good idea to encourage savings, a traditional piggy bank or pottery Taramundi, is a great way to start so that they can shake the jar and count how much they have. It’s good to have a goal and to save for something worthwhile and encourage them to do some simple chores around the house to boost their stash…
• Most children spend some time online, even if parents are managing to restrict screen time, and they will be targeted to make purchases and will quickly become familiar with advertisers interrupting their viewing. This is a good opportunity to explain to them how advertisers and influencers work and to help them to manage their online activity.  

Give children some real retail experience to help them learn

If purchasing clothes for them online – give them a budget and supervise their choices, showing them how the baskets work, the benefit of sale items and the impact of postage and packaging.

Help them take accountability

Same friend…same daughter – who had been eyeing a glorious sparkly velour jumpsuit in the supermarket – she had coveted it for weeks. It was relatively expensive, and my friend was waiting for it to be marked down in the sale. Then on one visit the little girl, who’d had a bad day at school, soulfully stroked it and asked again if she could have it. Rather than say no again, this time my friend suggested to her daughter might want to spend some of her own money on the outfit, money that she had counted out only that morning – and she had more than enough to afford it.

At the realisation that she might actually have to pay for the item herself, the girl’s attitude completely changed. The outfit went back and forward from the rack as this major decision was made. Even at the check-out, as the item was swiped through separately from the main shop and the mother handed the daughter a twenty-pound note saying, that this must be reimbursed from the piggy bank when she got home the daughter said, ‘I’m not actually sure if I want it now’. Of course she did want it, but she didn’t want to pay for it. The mother encouraged her to go ahead, pleased that this eight-year-old had grasped the consequences to buying the item and appreciated the feeling of security that having money in the (piggy) bank gave her.  The daughter now wears this item constantly, it means so much more as she bought it herself. 

3. SENIOR SCHOOL – give them as much financial information as they can absorb and keep them safe

• Moving through to Senior school more advanced financial concepts can be introduced. Always be positive, consistent and lead by practical examples rather than the ‘Do you know how much this cost? Please stop wasting food! Turn off the lights! ’ type of lecture. 
• It helps to explain how debts works – good and bad – credit cards and mortgages. Talk about your own experiences, how you bought the house they live in, or how you managed to buy that expensive item or holiday. 
• If you have managed to get them saving in a junior account – use this as a practical example of how compound interest works, explain their bank statements and introduce online banking – the positives and the pitfalls and the danger of fraud and scams.  And importantly explain how to keep safe financially. 
• As they finish school, prepare the young adults for the next stage. If they are going the university or college route, explain student loans, the financial ramifications of these and also the alternatives, apprenticeships, starting a job and that it is never ever too young to start talking about pensions – give examples from your own experience or that of their grandparents, explain how important financial planning is. 
• Encourage them to earn their own money – selling unwanted items online (e.g. eBay or Vinted), doing jobs around the house or seeking paid work experience and holiday jobs. 
• The investment options already mentioned for younger children are also relevant for this age group. 

Five Debit or Pre-paid Cards for 6-18 year olds.

These are a great way to manage pocket money as children get older. There are a few to choose from and it’s worth comparing the monthly fees, free trial periods and incentives -often cash bonuses to join. They usually come with an educational app which helps to teach good financial skills and with parental control so that activity can be monitored. They are a good introduction to managing money and encouraging responsibility. Ones to look at: 

1. Go Henry 

2. Rooster Money (Nat West) 

3. Starling Kite 

4. Revolut -under 18 

5. Hyper Jar 

4. SCHOOL LEAVERS/FURTHER EDUCATION/GETTING A JOB – when real independence kicks in along with more financial responsibility.

• Young adults will need to learn how to budget, feed themselves on more than cereal, and negotiate bills and rent along with responsibilities such as a TV licence, travel costs and maybe the expense of driving lessons. 
• Make sure students understand the implication of their student loan. 
• If your child is going onto an apprenticeship or straight out to work, their employer should be offering a pension, but it’s worth checking and suggesting top up contributions if they can afford it, and if they are still living at home, some active encouragement to do this by rent forgiveness is a good way to set them up. 

This period of their lives will involve a huge learning curve and the attitudes and strategies that you have been nurturing in the preceding years should bear fruit. They may be cautious, or they may go wild with the freedom, but let them make mistakes and learn from them.

Student Accounts – shop around 

Banks love to reel in students and the market is extremely competitive for student accounts with incentives such as free rail cards and interest free overdrafts. Advise your offspring to shop around and compare the incentives carefully. It is good advice to go for the largest and longest interest free overdraft on offer, although the pitfalls of persistent debt should be avoided at all costs. At the end of their course the student should switch to a graduate account, but hopefully by this stage your parental watch should be receding as they are into the workplace and hopefully all of their study will be being handsomely rewarded……….but 

The Impact of the Demographic Timebomb

What is almost certain for the younger generation is that our population demographic will be top heavy with a more numerous older generation who had a gilded financial existence, being supported by the taxes paid by the young. It will be a different landscape, less job certainty, accelerating technological advances like AI impacting on prospects. Public services groaning under the weight of possibilities and expectations.

It might be difficult to start a pension if you are on a zero hours contract, or you are paying 75% of your first salary in rent, or you don’t see a prospect of actually leaving home until you are 40. But the message must always be the same, start your pension early, even a little is better than nothing. I listened to a radio debate recently about retirement. A young contributor was asked when she thought she might be able to retire – her answer ‘When I am about 105!’ Unfortunately, I am not sure that she was joking.

The subject of financial education of the young can be expanded to cover many other topics, but some of these I will leave as food for thought. So, to recap and for possible further investigation: 

1. You are the best role model for your children – so get your own financial house in order too (we at Women’s Wealth are here to help with that). 
2. Talk about money, normalise the budgeting process, and celebrate when circumstances mean that you can afford something special. By osmosis, your children will learn habits and values. 
3. Don’t be afraid to say no – don’t give them everything they want – rewards will then be much sweeter. 
4. Participating in charitable giving whether it is saving 20ps in a smartie tube, or £1 for the non-uniform day, sponsoring your auntie’s half-marathon, or donating to charity shops – is a brilliant way to explain values and ethics. 
5. The green and sustainable debate can be had – i.e. why you might spend more on something that is less harsh on the environment in production – also talk about the carbon footprint and food miles. Why you might buy British or even local, rather than from overseas.  
6. What does success look like? Is it the pursuit of large monetary wealth or a more modest balanced life-style – and are the two necessarily contradictory?

Whatever stage you are at as a parent, prospective parent, young adult, grandparent – we are here to help with these important investment and money management decisions whether for yourself or your children – so please do get in touch with one of our money mentors for an initial discussion.

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