Money management can help to reduce the risk of your child getting into unmanageable debt later in life.
We place incredible importance on education in the UK, however, financial education is something that is almost never taught to children.
This can lead them to make avoidable mistakes in the future that could burden you as much as it does them.
This is where pocket money management can really change their financial outlook.
When your child finishes their education they are suddenly thrust into a world of finance they are not equipped to deal with.
They can find it emotionally distressing trying to balance the costs of everyday life.
In some cases moving back in with parents is the only option which can be financially difficult for parents themselves, leaving both parties in an undesirable situation.
Take matters into your own hands by using the following techniques to teach them about Pocket Money Management.
Education will give you a career, financial education will make you rich
Design A Budget
Setting up a budget is the quickest and easiest way to motivate your child towards financial matters and help them understand money management.
There are two concepts they need to be able to complete a budget – income and expenditure – which is simply what is coming against what is going out.
The task is a straight-forward one. They should be looking at how to increase their income and decrease their expenses.
Pocket money is usually the prime source of income for a child, with such limited income streams they should grasp the concept quickly.
You should also add a debt and saving strategy which will show them how pay off debt or make money in savings over a set period of time – more about this below.
Create an Interest Rate Incentive to Save
Saving money may not seem like the most important or interesting thing for a child so get them excited and interested by offering them an interest rate to save.
Devise a 12 month savings plan offering an interest rate of let’s say 50%.
If they have managed to save £100 over the year from pocket money and birthday / Christmas money, agree to pay the interest of £50 into their savings account.
Talk about Debt
It’s a taboo subject for many people, however, by talking to your children about debt young can alleviate the stigma that comes with it.
I wouldn’t expect a young child to have racked any debt up at such a tender age, but you may want to introduce a lending scheme.
Set out a payment plan on how they pay it back and when and ensure they stick to it.
Teach them that borrowing is not for extravagant purchases like a new bike or shopping for other luxuries. Only lend the money if it is for educational or personal growth purposes.
For instance there may be a school trip or holiday they want to go on or a laptop that can help them with their studies from home.
Emphasise the need to not take on too much debt and paying it off as soon as possible.
Teach them ‘Wants’ vs Needs’
Do they want it or do they need it? There is a fundamental difference.
Getting them to focus on what spending can actually be reduced is one of the most important aspects of finance you can teach your child.
Reducing spending on phone bills, buying one item of clothing at a time rather than a full on shopping spree are just a couple of examples.
Teaching these sacrifices at a young age can help to prevent frivolous spending later on in life.
Credit cards can be a dangerous commodity when left in young inexperienced hands and often at a younger age we lack the discipline not to overstretch ourselves.
If they are over 13 you may want to consider opening a prepaid account and adding them as an additional card holder.
The prepaid card would act as ‘family’ credit card to teach them the value of spending within their means.
As you control the credit limit there is no way of them running up significant amounts of debt. You could top them up at the start of the month and help them manage the budget.
Remember they have to pay you back whatever they have spent from their pocket money so it is vital that you help them manage the debt and advise on what not to use it for i.e. sweets from the shop.
Their makeshift credit card should be used for emergencies like a new tyre for their bike, not a brand new bike!
Your child may not become the next Richard Branson by teaching them pocket money management but they will be much further ahead compared to anything being taught in schools about finance.
How do you teach your children to manage money?