You start with great plans to go through the Financial Times with them every morning but it doesn’t seem to happen!
I'm a financial planner and father of five adult children. While my wife and I may not have taught my children as much about money as we hoped, we did make sure they learned ten important lessons.
1. Get them used to the concept of delayed gratification
When they were little they each used to have a sweet jar and were allowed on a Sunday to take only so many of them. This got them used to quotas and not being able to have everything at once. Delayed gratification is fundamental to good money management and this is a very easy way to introduce the concept.
2. Get them handling cash from an early age
I know debt counsellors who make adults pay for things with cash so they feel the experience of parting with money rather than using credit. It gets them into healthy habits and it’s something you can do from an early age. Even when they were toddlers we got our children to pay for things at a shop themselves. That’s quite a lot for them to take on board when they’re little but in that interaction they learned that something they wanted cost money and an exchange transaction was involved. They used to have a pocket money book – they got 10p a week for every year of age – and they had to sign to say they had had it. It gave significance and weight to the concept of being given cash so they didn’t take it for granted.
3. Set budgets
From a reasonably early age it is possible to find opportunities like birthday parties where you give them a budget and let them decide how to spend it. Typically this might be £100. That might take six friends to the cinema with popcorn and drinks included. But it might also pay for a party at home with food and party bags and many more guests. Some kids will go for the easy option, but others will have a spreadsheet going in no time researching and planning costs of every item. At a younger age it might be allowing them three rides or £5 to spend at a fairground. On holiday they might have a special extra pocket money budget – younger kids can grasp that more easily because it’s for a short piece of time. All children are different and they will respond to these opportunities very differently. When they got to university my children still had to budget – we paid their accommodation and travel costs. They had to make their student loan cover living costs for the whole term.
4. Offer to go 50:50
Often children will nag you for something they want. If it’s too expensive or you’re not sure, offer to go 50:50. That soon focuses the mind on whether they really want something and when they do buy it they seem to appreciate it more. Often they will have to save up their share – offering a top-up is an extra incentive that encourages them (and is one we all need even as adults – that’s how pensions and the Lifetime Isa work!). We took the concept through to supporting them at university. Because we only paid some of their costs they had to take the maximum loan so they were incurring the cost of education which made them appreciate it more. And having to pay this back out of income when they started to work reinforces the point that debt has to be repaid.
5. Teach them about interest
I have a client who whenever he sees TV adverts for pay day loans or debt agglomeration products plays "spot the APR” – shouting out the annual percentage rate of the loan in the small print and then getting the kids to calculate the impact this would have on a £100 loan over a year. He says his children laugh at him but he’s pretty confident that they’ll be very wary of falling into credit card debt needlessly when they grow up.
6. Give them a debit card account
Many of our clients pay their children’s pocket money by standing order into a children’s debit card account. Birthday gifts from relatives can go in there too. Many banks now offer these – for children as young as 13. They can’t go overdrawn and they get used to managing a bank account and spending with a card. Get them to keep an eye on the interest rates and encourage them to switch if a better offer is available.
7. Increase their budget and their responsibilities as they get older
As they reach their mid teens start transferring responsibility for more of their day to day spend (bus fares to college, lunch money, clothing extras) to them. Make pocket money an “allowance” that covers these costs. Then watch them suddenly start taking an interest in meal deals and walking more!
8. Get them confident about investing
Set them up with a Junior Isa and, when they’re old enough, encourage them to invest it themselves. If they want a cash Isa, let them find the best deals, but if you set it up using a fund supermarket, you can get them to invest in funds too. Teach them (or learn together) the difference between equities and bonds, encourage them to look at investment costs and make sure they think of investments as manure – something to be spread! Start with funds – the transaction costs of trading equities are too high on a small portfolio and you want them to learn to build a diversified, balanced portfolio rather than become gamblers, spotting winners and getting their fingers badly burned. It is going to be difficult for the current generation to have the lifestyle their parents and grandparents had because the middle class tickets of expenditure like school fees and houses tend to rise faster than inflation so they need to learn to make their money work harder. If they have a positive and balanced experience of investing and investment risk early on in life it could make a massive difference to their financial wellbeing over a lifetime.
9. Talk about salaries and get work experience
We always encouraged our children to talk about what they wanted to do with their life and share their dreams. We would then think about salaries and jobs that would help them fulfil these dreams. Both our boys worked in the local butcher over Christmas. It was purgatory, working from 5am to 10 at night, plucking pheasants, clearing out the ham smoker and delivering turkeys. They’d come home with blood splattered all over their shoes. One of our daughters worked in a care home looking after people who were incontinent. This taught them to appreciate how hard people have to work and think about the jobs they would prefer and what qualifications they’d need to get.
10. Teach them to haggle
Whenever we went abroad and there were economies based on the barter principle we’d make the kids do their own haggling. That’s remained with them. We’re taught it’s crude or vulgar to haggle in Britain but my kids will instinctively ask for a discount and often get it.
Charles Calkin is a financial planner with James Hambro & Co.