Ensure your kids are financially independent
As financial education is still not a compulsory part of the school curriculum, it's up to parents to teach their offspring about money and how to become financially independent.
However, a recent study by The Children's Mutual has identified a new generation which considers itself to be 'financially independent' while still accepting parental subsidies for everything from day-to-day living costs to house deposits. The study suggests that this generation is set to keep bouncing back for support, and this could have a serious impact on some parents' financial futures.
David White, chief executive of The Children's Mutual, says: "There has been a major change in the dynamic of family finances, and the whole issue needs to be dealt with now, otherwise the problem will continue to grow. Many parents of young adults are choosing to make their childrens' finances their problem. They are increasingly faced with difficult choices, such as whether to take on more debt or reduce their funds."
So how can you stop your kids becoming a constant drain on your finances? Experts say you could avoid this by teaching your children about money as early as possible.
Young children need to learn about the value of money and saving, while older offspring need budgeting skills for when they leave home and have to manage their own household budget.
To help you on your way, here's our guide on how you can teach your kids to become financially savvy.
0 to 12: Growing up
Young children tend to be curious about money and taking them shopping can be the ideal opportunity to teach them about how much things cost. As well as asking them to help you hand over the correct money or check the change you're given, you can also point out how much different brands of food cost.
Experts say young children also need to understand the relationship between work and money. Some children simply think that money comes out of the cash machine, so it's important to teach them that mum and dad go to work to earn money. You can do so by perhaps taking them to work one day or showing them your payslip.
Giving children pocket money is also a good idea as it gives them a sense of independence, and they can make choices about how the money is spent. Parents could, for example, encourage them to save a proportion of their pocket money by opening a childrens' savings account.
As well as explaining how interest works, parents should also explain the difference between saving and investing. This can be illustrated by, for example, getting your kids involved in deciding what to do with their child trust fund vouchers.
Children born after 1 September 2002 are each given a £250 CTF voucher (or £500 if you qualify for the full child tax credit) at birth and another £250 voucher (or £500 if you still qualify for the full child tax credit) at the age of seven. Parents and other relatives can pay in an additional £1,200 each year with the gains or dividends paid tax-free. At the age of 18 the money becomes the child's to spend as they see fit.
13-18: The teenage years
Now is the time when most young people get their first current account. If they have a part-time job, they'll normally need an account for their wages to be paid into. The Abbey account (for 11-to-15-year-olds or 16 to 18-year-olds), Natwest's Adapt account, Lloyds TSBs Under 19s account and HSBC's MyAccount are all designed for teenagers.
The accounts usually come with a cash card and PIN number, allowing accountholders to use cash machines, while some offer a debit card, as long as parents give their permission for this.
When the child reaches 18 the bank will normally try and upgrade them to a student or a normal account. However, this is a good opportunity for teenagers to start shopping around and find the best account for their needs.
As well as learning basic budgeting, teenagers should also be encouraged to save for things like going to university or buying a car, and to shop around for savings accounts paying the highest interest rates.
Once they turn 16 teenagers can open a cash ISA and save up to £3,600 a year without paying tax on the interest. Alternatively, they might want to open an instant access savings account.
Some best buys are open to those aged 17 and over, although for some accounts you have to be at least 18.
University is likely to be the first time your children live away from home and have rent and bills to pay, so it's important they learn to budget and don't just blow their entire student loan or grant straight away.
Students should work out how many weeks their student grant or loan has to last them and divide the money into weekly chunks. They should then add up how much rent, bills, travelling and food - the 'essentials' - will cost and then they'll know how much money they will have left over for non-essentials, such as clothes shopping and going out with friends.
Keeping a money diary can help students identify where their money is going. There are plenty of budget planners available online such as the Moneywise budget planner.
Students are targets for banks keen to secure long-term customers at an early age. Student bank accounts normally offer generous overdraft rates and limits. For example, last year Halifax offered students an interest-free overdraft of up to £3,000 for up to five years of study.
Students and young people starting work are also likely to be offered credit cards and loans for the first time. It's important they realise the implications of taking up these offers of credit, especially the fact that they may well end up paying back more than they initially borrowed, and the effect that any missed payments will have on their credit rating.
When children reach 18 they might also gain control of accounts opened in their name by their parents. For example, in 2020, the first CTF will mature.
According to Moneysupermarket, parents who choose to invest their child's CTF into stocks and shares, and pay in a further £1,200 each year, could amass for their offspring more than £40,000 by the time they turn 18. It's important that the child knows how to spend this wisely.
If you want to save money for your child but still be in charge over what age they get access to it, then you could place an investment or an asset (but not a CTF) in a trust. This way you'll have more control over the money. But setting up a trust is quite complex, so you'll need to seek professional advice.
21 and up: Becoming a young adult
If you think that your child's graduation ceremony will signal the end of their financial dependence, think again. More and more children are returning to the family home after they've officially moved out. It could be wise to start charging them rent, even if it's not at market rates.
This is also a good time to encourage them to get on the property ladder and to think about pensions and insurance. You might want to consider giving them money towards a house deposit.
Another important lesson to teach them is the difference between good and bad debt. 'Good debt' is an investment such as a mortgage, a career development loan, or a car loan if they need a car to get to work. 'Bad debt' is wasting money on things they can't afford and don't need.
More adult children are relying on their parents for financial help. According to Abbey, 440,000 25 to 34-year-olds returned home to live with their parents in 2008 or stalled plans to move out in order to save money, with a further 471,000 among 35 to 44-year-olds.
As well as providing a roof over their heads, parents are also bailing their grown-up children out in other ways such as helping with the deposit for their first home or helping to repay student debts.
Research by Scottish Widows found that more than half of parents have given or loaned their adult children or grandchildren a substantial amount of money from their own savings, and this has increased from £67 billion in 2008 to £72.5 billion in March 2009.
The provider also found nearly a quarter (24%) of adult children are using or have used parental handouts to fund their daily living expenses or as spending money. Over a third (38%) needed the money to pay off debt, and 30% used the cash for a house purchase.
However, while your kids will always be your kids, once they have grown up it's high time to teach them that the bank of mum and dad is about to close and they need to handle their own finances.
When you should bail your kids out
* Medical bills: If your child has an accident or falls ill, you should consider paying for medical costs if it gets them fit and well quickly.
* Legal costs: If your child has to fight a legal case they would benefit from help with the bill, especially if the situation has arisen through no fault of their own.
* If they're in danger: If they have naively got involved with drug dealers or loan sharks and are in physical danger, it would be wise to bail them out.
* To further their career: Supporting your child through a work experience placement or internship, or buying them a car to travel to work can be a good long-term investment.
When you shouldn't bail your kids out
* Bank overdrafts and credit card debts: If they've got into debt as a result of hedonistic living, helping them pay their debts won't help them learn to manage their finances.
* Speeding tickets and parking fines: Children of any age need to learn that their actions have consequences, so make sure they pay off fines themselves.
* If it puts your own finances under strain: Adult children should be able to stand on their own feet, so don't give them money if it leaves you struggling.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Child tax credit
A scheme started in 2003 that sought to replace a raft of other tax credits and benefits, the payout depends on the number of dependant children in a family, and its level of income. The amount of credit is reduced as income increases. It is payable to the main carer of a child, usually the mother, and is available whether or not the recipient is working.