Finance can be a minefield, even if you previously done your homework. So imagine how confusing it can be when you are suddenly thrust into the world of finance without any prior knowledge of the way it works.
As soon as we all reach eighteen, the banks start to tempt us with exciting offers of credit cards, loans and overdrafts and for many of us it is seen as quick, free money and it often leads to a life paying off a debt that just never seems to decrease.
On that basis, isn’t it time we started to teach children about finance a lot earlier in life? Surely we could have all have benefited from some financial education before we had left school?
Today I’ll discuss some great ways you can prepare your children for the world of finance to make sure they have the best possible chance of avoiding issues with debt later on in life.
Let them help you devise a family budget to understand how much it costs to run the house
How do you expect your child to understand the value of your hard earned money if they have no concept of what things cost compared to what is coming in? I can almost hear the arguments I used to have with my mum over it, “I can’t afford it” never used to quite satisfy me, I always thought the money was there and it was just my mum being stingy. I questioned everything and it’s a small wonder I’m still here to tell the tale.
Now I realise how much my poor mother used to have in her bank to budget for everything I’m completely horrified at the many tantrums I made her deal with. I wasn’t a spoilt kid, and if she had sat me down to explain what comes in against what goes out, she wouldn’t have heard a peep out of me. I just never took anyone’s answer as final unless I could see concrete evidence to support it – maybe that’s why I went on to do so well in sales?
Sit them down, you don’t have to tell them the absolute ins and outs of your personal finances, just explain this is what is coming in, that is what is going out. Make a budget so they can visualise it, let them help to decide on how to spend the excess for a treat or day out. Teaching them that money isn’t endless will help them understand sometimes we have to set limitations on what we can afford that month.
Making them feel included in the decision gives them a sense of responsibility and a feeling that they have had some input into one of the most important decisions in the house. Who knows, you may never have to use “it doesn’t grow on bloody trees you know” – ever again.
Create them an account in the Bank of Mum and Dad to encourage saving
Or as it was in our house, the bank of mum! Make a spreadsheet to record their deposits into the bank of mum and dad. Encourage them to save a portion of any pocket money receive, whether that is from you, grandparents, auntys and uncles or just friends of the family.
Offer them an interest rate of 10%. For every pound they save, they will be rewarded with 10p interest added on top. If they did that weekly, in the first month their £4 savings will have earned them a further £2.20 taking their total to £6.20.
Watching their money grow by simply saving it will encourage them to start saving. Why wouldn’t it if it is making them more money? Once they have saved £50-£100 maybe consider transferring to a savings account or a Junior ISA.
Saving is a habit, once you have formed a good habit and made it part of your everyday routine, it becomes just as hard to shake off as a bad habit. Getting them to understand the importance of saving earlier in life will instill this good habit into them. If they are used to having a pot of money for rainy days, holidays and emergencies, they are much less likely to see borrowing their way out of trouble as a good option in the future.
Get them familiar with using a bank account
A great way of teaching your child about banking is to set up a prepaid account in your name and add them as an additional account holder, that way you can track their spending habits and act accordingly.
If you see them blowing their money (or should I say your money) on absolute rubbish every week you can intervene and explain that just because the money is in your bank, it doesn’t mean it is there to be frittered away on any old purchase willy nilly.
The benefit of having a prepaid account is they can only spend what you load onto the card, stopping them from running up any unnecessary debt. When you feel they are ready, you can upgrade them to a traditional high street bank and be safe in the knowledge that you educated them properly and they are now ready for the next step.
Having a prepaid account is also much safer than carrying cash, it also means that should there be an emergency and you need to send them money to get home as an example, you can top them up from home and have the peace of mind that they can get home safe.
Offer them a loan with an interest free period
OK, I’ve not totally lost my mind here so bear with me. Loan is not a dirty word, sometimes they are necessary and if the money is used sensibly then it can be a good thing.
When searching for a loan the most crucial thing is to find a provider whose terms allow you to pay it off as cheaply and as quickly a possible. How would you know this without education first?
If your child is looking to purchase something that is more than their current savings pot and it’s something you consider to be of big enough need, offer them a loan with an initial interest free period say of six months.
They now have six months to pay back only what they borrowed. If they leave it too late to pay back inside their interest free period add a 10% monthly interest charge on the outstanding sum. Nothing will teach them to pay back a loan quicker than the original loan increasing in size.
This will teach them to seek out the best deal with the best repayment terms. If they are already in the habit of aiming to pay things back as quickly as possible it will stop them spreading the cost over a number of years, getting stung by interest charges and running up debt they may struggle to pay back later in life.
Create their own credit card
Just like the loan, I haven’t lost my mind and there is method behind my madness! Apply for a prepaid card as there are no credit checks and no negative imprints on your credit file by doing so. Add your child as an additional card holder to the account – they must be over 13 years of age – with the card in their name it will make the credit card concept seem much more real.
Now, top up the card with £40 credit. The money is your childs to spend however they wish – within reason! Continue to give them their pocket money as usual. For this example let’s say they receive £10 per week.
The card comes with a 10% interest charge at the end of the month on any balance still outstanding. So, if they have spent the full £40 balance by the end of the first month and have not cleared their balance, they owe you £4 in interest charges from their first weeks pocket money the following month. Leaving them with £6 pocket money and the £40 outstanding balance is still owed.
If they have been frivolous with their spending and have not been sensible enough to pay it back they are already £4 out of pocket. 1st lesson about using and paying credit back wisely learned!
If they continued to dodge paying the money back over the whole year it would cost them £48 in interest charges, plus the £40 they originally borrowed.
When debating whether children need this kind of education (with one person in particular) I always say, “would you throw your child into the deep end of a swimming pool without teaching them to swim?” Luckily, so far, everyone I have posed that question to has said no! Prevention is better than cure, teach them young and watch them flourish later on knowing that it was your teachings that set them on the right path in life!
What financial education do you plan on teaching your kids?
This post was written in collaboration with icount Money, the award winning prepaid account.
He is also a contributor to Clear Debt, ICOUNT Money and M1 Debt Advice blogs discussing all things personal finance.