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When your children or grandchildren are still young, any habits they form will likely follow them into adulthood. This is especially true of habits regarding money, as instilling them with financial literacy now could empower them to make informed decisions throughout their lives.
10 to 14 June was My Money Week, a national activity initiative dedicated to improving financial literacy among young people and getting them interested in managing money.
Reflecting on this excellent campaign, continue reading to discover five finance lessons to teach your children and grandchildren today to help them effectively handle their money in the future.
1. How they can manage a regular income
While younger children might not yet have a regular income, it’s still practical to introduce them to this concept.
You could do so by giving them pocket money. For instance, you could offer them small amounts to complete tasks around the house, such as washing dishes or cutting the grass.
Then, you could gradually increase the amount they receive based on the effort required, demonstrating the link between hard work and income. Even a small allowance reinforces the idea that earning requires effort.
This naturally leads to another important lesson: living within their means. It’s worth ensuring that your child or grandchild understands their expenditure shouldn’t exceed their monthly income.
You could also explain what might happen otherwise by introducing them to the concept of debt. You could briefly explain how borrowing money means paying interest, potentially leading to a cycle of debt.
2. How debt is a double-edged sword
On the topic of debt, it is an inevitable part of life for many. So, teaching your children how to responsibly manage it could prepare them for the future.
It’s worth explaining the difference between “good” and “bad” debt. Not all debt is inherently negative – a mortgage, for instance, allows them to buy a house that could appreciate in value.
Conversely, “bad” debt often arises from spending beyond their means, usually on non-essential items, such as a new TV or expensive clothing.
This could be the ideal time to warn your child or grandchild about credit card debt and “buy now, pay later” schemes. The latter lesson could be especially relevant considering the popularity of these services on many online shopping websites.
You could explain that these forms of debt often have high interest rates, making it easy for debt to snowball, which could then affect their financial and mental wellbeing.
To reinforce lessons about good and bad debt, you could teach them the difference between “wants” and “needs”. Encourage them to ask themselves if it’s really worth getting in debt over a specific purchase.
3. The importance of saving
When your children or grandchildren understand the concept of an income and living within their means, it might then be worth emphasising the power of saving.
Regularly saving their wealth, even small amounts at a time, could create a healthy habit that will reap rewards later in the future.
If your child or grandchild is younger, a great way to illustrate this lesson is by purchasing them a piggy bank.
Then, encourage them to save towards a long-term goal, such as a coveted toy or video game. This could help them realise that even things that seem expensive in relation to the money they receive each week are attainable with a bit of forward thinking.
You might also consider opening them a children’s bank account, such as a Junior ISA (JISA). It’s worth pointing out that your child won’t be able to control their JISA until they reach 16, and can’t access the wealth within until they’re 18.
Regardless, encouraging them to save their own money into a JISA could foster responsibility and autonomy, while giving them a sense of ownership over their savings.
4. The value of compounding
Named the “eighth wonder of the world” by Albert Einstein, it’s undoubtedly worth teaching your children or grandchildren about the power of compounding interest and returns.
Granted, this can be quite a complex concept for younger people to wrap their heads around. So, you could help them in the form of a game, such as the “bank of treats”.
Give your child or grandchild a small number of their favourite sweets and encourage them to store them in their “bank”. Then, periodically give them more treats, demonstrating how delayed gratification could earn them more in the long run.
Ensure they understand that even small amounts of money saved consistently could grow significantly over time thanks to compounding interest. This mirrors the “aggregation of marginal gains” strategy – which we wrote about in a previous article – used by the GB cycling team.
When your child or grandchild appreciates the power of compounding, they might be more eager to save both now and in the future.
5. How employees are paid
Many young adults might be shocked when they receive their first salary payment and it’s not the full amount they expected.
Taking the time to teach your children and grandchildren how to decipher a payslip now could help avoid any surprises later down the line.
A simple and practical way to do so is by showing them one of your payslips and going over the details. You can then discuss:
The relationship between tax codes and the Personal Allowance
The different rates of taxation
What National Insurance is and how it’s charged.
You might also want to take this chance to discuss employer and employee pension contributions, and how they are deducted from a salary.
This opens the door to early conversations regarding budgeting around a salary and planning for their financial future.
Get in touch
Just like your children or grandchildren benefit from having you assist them with financial matters, a planner could help you.
Email info@athertonyork.co.uk or call us on 0208 882 2979 to find out more.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
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