Teaching kids the financial facts of life
The Moneywise Kids & Cash campaign is all about getting personal finance education into the classroom. After all, the younger generation will need to find some means of navigating around problems such as the UK’s unaffordable housing, growing consumer debt and rapidly dwindling pension pots.
To date, government attempts to deliver this kind of financial education through schools have been inconsistent and half-hearted. Although economic wellbeing and financial capabilities will be taught in personal social and health education (PSHE) in secondary schools from September 2008, these subjects will not be compulsory, and it is unclear how many schools will teach them.
Skills for all ages
This all means that, for the vast majority of families, the onus is on parents to teach their children the value of money and help them learn how to manage it better. Fortunately, whether your child is at playschool or about to leave home, there are many ways you can do this.
For very young children, games - such as playing shop, for example - can be a great way of introducing them to the concept of money, says Sarah Hughes, a teacher at an infants school in Billericay, Essex.
As soon as your child has money of their own - whether it’s pocket money, or gifts on birthdays or at Christmas - it’s worth introducing them to the concept of saving and interest.
If your child was born after September 2002 they’ll have a child trust fund (CTF) into which you can pay up to £1,200 tax free each year. However, as your child may well want to spend some of their savings before they turn 18, it’s worth setting up an ordinary savings account too.
Online accounts are simple and easy to run, but to really help your child learn about how banks work it may well be worth opting for a branch-based account. This way you can make an activity out of paying money in and seeing how much it has grown by when the statement arrives in the post.
Hitting the pocket
Once children turn eight or nine - or as soon as they’ve developed a taste for spending - teaching children the value of money and helping them understand that money does not, in fact, grow on trees, should be next on the agenda.
This is where it can helpful to give your child a strict amount of pocket money every week and stick to it. The idea is to give them a taste of what it’s like surviving on what you have and make them think much more carefully about how they spend their money. Do they blow it all on the first day or make sure it lasts the week?
While pocket money should be a fixed amount, children can supplement it by doing jobs around the house, such as washing the car or vacuuming, which provides a first taste of actually working for money.
Once children are at secondary school, peer pressure can really set in, and they start wanting the latest computer games or fashionable clothes.
At this point you may want to introduce some kind of paid employment that does not interfere with their school work.
Many young adults, on hitting 16 and 18, decide to stay in further education, which often means going away to university. Student debts of £20,000 are now the norm, so if your child wants a degree it’s worth discussing money before they head off.
If you will be giving your child financial support - through university, for example - make sure you agree on what form this will take. It’s often better to pay a monthly allowance or send a cheque straight to their landlord than shell out as and when your child runs out of money. Only if they have a clear idea of exactly how much money they have coming in will they be able to budget and make sure their money lasts the whole term.
Borrowing: The good and the bad
In addition to helping your child budget, it’s also essential to teach them the difference between good and bad borrowing. A student loan payable at the rate of inflation, for example, is far preferable to a credit card debt with an 18% APR or, even worse, a store card loan at 30% APR.
Being realistic will also help your child. For example, instead of advising them not to use their overdraft, explain that going over the agreed limit will result in unnecessary charges and damage their credit rating.
Further education may act as the trigger for parents to release some lifelong savings. But, be wary of lumping them all on your 18-year-old at once, says Rachel Thrussell, head of savings at Moneyfacts.
“This is where CTFs, which are automatically transferred into your child’s name when they are 18, can come unstuck," he adds. "If you have saved the maximum into a CTF from the point when the government vouchers were first issued and stockmarkets perform as they are expected to, there could be a balance of up to £30,000 in the fund. This is clearly a lot of money, and using it will require some thought.”
If your offspring opt to start work at 16 or 18 it’s unlikely they will be fleeing the nest any time soon. House prices are 176% higher than they were 10 years ago, according to Halifax, and rents are rising. The latest buy-to-let index from Paragon shows that the average monthly rent reached £990 in February this year.
But if your children are grown up enough to work, they are grown up enough to pay rent, says retired teaching assistant Brenda Brady, 69, who took this line with her three daughters, now aged 30, 35 and 37. “I charged all of my daughters rent – albeit a nominal amount of around 20% of what they took home. It was payable on payday, whether this was weekly or monthly,” she says.
However, rather than spending this money, Brenda put the money to one side to ensure that when her daughters needed the money - to go travelling, get married, or buy a house, for example - it was on hand. “I thought of their rent as a kind of forced savings scheme for them, so I never felt guilty for collecting it,” she adds.
Of course, the effectiveness of this approach hinges on the fact that your offspring are totally unaware of your intentions, says Brenda. “The fact that you pay for board and food once you start earning should not even be a matter for discussion. None of my daughters argued about it - I suppose they saw the sense of fairness too.
"And ultimately, teaching them the value of independence is worth so much more than a few extra pounds a week that will soon be forgotten.”
Meanwhile, the push is still on for more financial education in schools. “[But] while at primary level, the government and schools alike are doing all they can to teach children about money, not enough is being done in secondary schools,” says teacher Sarah Hughes.
“It would be great to see local banks and building societies come into schools and give talks on the different forms of borrowing, what they are used for and the impact that interest rates have. For previous generations, when unsecured debts were unheard of, there would be no need for this. But education needs to catch up – it needs to be relevant to the time and society we live in.”
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.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
This is used to compare interest rates for borrowing. It is the total (or “gross”) interest you’ll pay over the life of a loan, including charges and fees. For credit cards where interest is charged at more frequent intervals, the APR includes a “compounding” effect (paying interest on interest). So for a credit card charging 2% interest a month (equating to 24% a year), the APR would actually be 26.82%.
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.