Gurmail Raju, financial planner at Ryley Wealth Management Ltd, shares his thoughts on why it has never been more important for children to learn about finances along with his tips for getting families talking about money matters with their youngsters.
Financial worries and debt concerns are a very real issue here in the UK and it’s a problem which is affecting the mental health and wellbeing of so many across the nation. Despite this, financial education amongst children is still widely perceived to be lacking in the UK and was only introduced onto the national curriculum in 2014.
Engaging youngsters with discussions about finances and saving for the future can make a huge difference to their future financial journey and alert them to the dangers and consequences of going into debt further on down the line. Given that many Brits currently have debt in some form, with many people feeling they’re not in control of that debt or that they know how they plan on paying it off, it’s clear to see the importance of correct financial education.
If you’re yet to have these discussions with your children, then don’t worry, you’re not alone. To help guide you through, here are a few tips to help you get your family financially clued up.
Discussions about money can be tricky and are rarely a popular conversation topic around the family dinner table. However, starting these chats with children from an early age will lay the foundations for good financial habits in later life when they’re earning their own income.
Picking up these conversations with children as early as three years old is a good age to start, followed by a refresher each year until the age of eighteen, and when they leave home and become more financially independent.
Get savings savvy
If children only learn to spend everything they earn, then when they’re older, they could soon find themselves one of the many Brits who do not have enough emergency savings or indeed any savings at all.
Without an adequate understanding of the importance of saving for a rainy day, it means that should an unexpected event occur, it could mean having to borrow money and pay off debts, which can be a slippery slope.
The importance of splitting income into pots
Getting children into the habit of splitting all earned income into pots is a great way to help them manage their finances.
One pot should be used for essential items such as living costs or essential food, whereas another pot should be used for discretionary costs such as buying clothes, going for a meal with friends or perhaps going to the cinema.
Next, a pot for shorter term needs should be used for building up an emergency fund and only dipped into for essential things such as home improvements (later on down the line) or a deposit for a new home.
The final pot should be for longer term savings and saved in a savings account so they can experience first hand the potential benefits of compound interest that can lead to higher rewards, allowing them to plan for a special holiday, a new car or retirement.
Naturally, some of the scenarios mentioned above will not concern youngsters as understandably no five year old is going to be paying for home improvements, but even educating them on the importance of different pots and encouraging them to start splitting their pocket money or allowance into two pots at first, is a step in the right direction. Then, when they’re older, you could encourage them to increase the number of pots as their responsibilities increase.
Essentially, it all boils down to the popular mantra, Spend some, Save some and Grow some.
Financial literacy and education have such an important part to play in fostering good money habits and is one of the first step towards closing the poverty gap, improving wellbeing and helping to give children a brighter future. But the key will lie in starting these money discussions with children early, so that when they become financially independent, they already have a solid foundation to help support them and an action plan towards a better future.