Handling money is a crucial life skill. We all need to know how to use it wisely and how to make it go further – particularly as we grapple with the rising cost of living.
Today, with social media influencing buying decisions and investment scams on the rise, healthy financial habits should be embedded early, starting at home.
Showing what money’s worth
When so many transactions are made online or with bank cards, young children may struggle to understand that real money is involved. So, in an increasingly cashless society, we need to teach children to appreciate money’s real value from the get-go.
This can help kids in later life to resist the lure of credit and appreciate the hidden costs associated with careless use of electricity, mobile phone data or initially ‘free’ trials. It can also help them tackle the temptation to spend too much on things they don’t actually need.
Financial literacy has been part of the UK National Curriculum since 2014 for secondary school children. But in June 2023, the Money and Pensions Service financial wellbeing survey found that only 47% of children and young people could recall receiving a meaningful financial education, and only 10% had received such education at both home and school1.
With wages often failing to keep pace with inflation, today’s school leavers need all the help they can get in adjusting to the working world. While schools can enhance the learning experience dependent on the curriculum, parents have a vital role throughout their children’s upbringing to ensure they are armed with the right tools as early as possible. Skills learned in childhood could have an impact on financial decisions made decades later.
How to start
From an early age, children are naturally curious about buying things – whether it’s toys, treats or household items.
By simply talking openly about money, you can help your child to feel confident in understanding and handling finances. It’s also important that money doesn’t become a taboo topic. If children see it as something that adults find awkward to discuss, they may be reluctant to ask for advice themselves.
As parents, we all have different preferences about how much pocket money to provide and whether it is tied to certain responsibilities. Earning an allowance can mimic an employment situation, helping to incentivise children to “work” and then save up for things that they want.
Meanwhile, talking to your child about their savings goals – for a new toy, for example – can help to keep them engaged and motivated. Similarly, something as simple as having a see-through piggy bank can help children literally see their money grow. As for when they spend it, they’ll see it reduce.
This can help children understand the concept of “when it’s gone, it’s gone” and may encourage them to learn about budgeting and keeping some money back for the future.
Building upon good habits
Once your child is a little older and has mastered the concept and value of saving, you may want to consider teaching them about investing.
The cost-of-living crisis may have led some people to question whether investing is affordable alongside all the other claims on our money. And for those who are continuing to invest, it may have pushed some to take more risk and look for higher returns. It’s no coincidence that investment scams are at an all-time high.
But getting into investing early can be a great way to build wealth and confidence over the longer term. Of course, children under 18 are unlikely to have the funds to invest themselves but if you plan to invest on their behalf, in a Junior ISA, or JISA, for example, you can still involve them in the conversation.
Parents or parental guardians can easily set one up, but anyone can contribute, up to a maximum of £9,000 for the current tax year. Proceeds then grow free of tax on capital gains and dividends or interest, with any withdrawals tax-free too. When you feel they’re old enough, talk your children through the choices you’ve made in their ISA and why, together with what some of the terms mean.
Although children may be keen to invest in companies that they know, such as their favourite brands, you can talk about how spreading money across a broad spread of companies (for example, through an investment fund) is generally a lower-risk way of investing as it avoids "betting" on the fortunes of just a few firms.
This can also help them to understand how they can manage risk – which is another important life skill. Taking more financial risk tends to come with a rockier ride, but the rewards can be greater – though there are no guarantees. And if something sounds too good to be true – no risk, big reward – then it probably is!
A JISA can also help establish and strengthen the link between healthy investment behaviours – such as keeping an eye on costs and being disciplined – and long-term financial success. Once a year, for example, you can show your child how much their account has grown by or fallen in value and discuss whether their Junior ISA is on track for what they may want to achieve with it.
Most JISAS will offer a whole host of investment choices, including index funds. We offer a Junior Stocks and Shares ISA at Vanguard, through which you can pick a ready-made portfolio or build your own (or with your child).
1 Financial and Enterprise Education in Schools, 1 September 2023 research briefing, House of Commons Library SN06156.pdf (parliament.uk)
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