Teaching your kids about money

You can start talking to your kids about money as soon as they can walk and talk.

Teaching your kids how to manage money is one of the most valuable skills that you can pass on to them. When they have a solid financial foundation, they will be equipped to make good decisions, avoid the debt cycle, and build their own wealth. Just follow these steps to give your child the best chance of financial success.

Step 1: Demystify money

The first step is simply showing your kids how money is used in your day-to day lives, so they are aware of the value of money from an early age.

It may be challenging to explain the concept of capitalist economics to a toddler, so start by familiarising your young kids with coins. Show them how each coin is a different shape, size, colour or weight, and help them to identify the coins which have the highest value.

Next, show them how adults use these coins and paper notes in exchange for goods and treats. When you take them grocery shopping with you, make a point of counting out the cash that you will use to pay the bill, so that they can see you putting your counting skills to good use. After a couple of grocery store trips, you could allow your child to hand over the money to the cashier. This makes them part of the transaction and reinforces the lesson that coins and paper money can be exchanged for goods that you want and need.

Step 2: Give them their own money

The next step is teaching your kids how to earn their own money. This will help your child to associate their own skills and effort with the ability to earn money, which will set them up well for life in the workforce. Start small and ask them to clean up their toys for a small amount. As your child gets older, you can offer them more money for more valuable services such as cooking the dinner or cleaning the car. If you prefer to give them a weekly allowance, make sure they understand that they will only get this money if they are actively helping around the house.

Step 3: Show them how to save

Earning money is one thing, but saving it’s another matter. One of the most important life skills you can pass on to your child is the ability to save money, no matter how much or how little they are earning.

This is about teaching good habits. When your child receives any cash, encourage them to save half of it. Buy them a money box and praise them every time they use it. Talk to them about their savings goals. Explain what different amounts of money can buy and encourage them to set age-appropriate savings goals.

When they are old enough to open a bank account, go with them and make sure they understand the difference between a current account and a savings account. This would also be a good opportunity to introduce them to the concept of interest rates, so that they can start getting a sense of how their money can make money.

Step 4: Talk about your financial mistakes

Nobody wants to talk about their financial losses but owning your mistakes and discussing them openly is the only way to ensure that your kids don’t fall into the same financial traps that you did. Tell them how it affected you when you fell behind with your credit card payments and had to go to court. Describe how it felt when you overshot your monthly budget and had to survive on baked beans and tap water. Explain the impact of a bad bet, or a loan between friends that went belly up. Be honest with them and share with them the lessons that you learned from your bad financial decisions.

Step 5: Invest on their behalf

You don’t need to be a millionaire to set up a trust fund for your kids. If you start early and save a little every month, by the time they are 18, you could save a substantial nest egg for your child which will help them on their own financial journey through adulthood.

Even if you’re only able to save £10 a month, over the lifetime of your child this can really add up. If you put £10 aside every month from the day of your child’s birth, that would add up to £2,160 within 18 years, before any interest has been factored in. Not a bad 18th birthday present!

You could also take advantage of long-term bonds with a 10-, 15- or 20-year investment horizon. Bonds are seen as relatively low risk investments, and their rates are typically higher than cash savings accounts. This means that you can invest a lump sum of money, and at the end of the bond’s term time this money will be returned along with any interest payments.

By saving on behalf of your child, you can gift them with a lump sum when they are old enough to really need it, either to help fund their further education, to buy their first car, or even put a deposit on their first home. This will set them up for the future, so that they will be able to grow their own wealth and make good financial choices.