Only recently, the UK government announced plans to ensure financial education becomes part of the school curriculum. In reality, elements of financial education have crept into other topics, such as maths, but this topic should stand alone. Even though the authorities are taking the lead concerning schooling, there is still a significant role for parents to play in their child’s financial education.
The stigma attached to personal finance
Unfortunately, many stigmas are still attached to personal finances, with older generations often reluctant to discuss these with their children and wider family. Many people first learn of their family member’s wealth when they die and collect their inheritance. However, it is perfectly feasible and sensible to start teaching your children about finance from a relatively early age. This should be seen as laying down the foundations for the future.
Setting a foundation for financial success
When you consider that many people leave school without a real understanding of personal finances, this is akin to being thrown into the deep end of the swimming pool, unable to swim. No sensible person would do that, so why do many of us stand by while our children grow up with no meaningful understanding of finances?
Key financial concepts
There are five key concepts when it comes to financial literacy and awareness. The subjects you discuss and the depth of information provided will depend on the individual’s age, but anything is a start.
Budgeting
Hands up, how many of us left school not even knowing the cost of a pint of milk or a loaf of bread? Budgeting creates the foundations for additional vital financial concepts, gradually building up a broad understanding of personal finance. Whether learning to budget their pocket money or part-time employment income, this will help teach the value of money.
Saving
The sooner your children learn to save, the sooner they will appreciate the value of money and their “rainy day” funds. Even in adult life, it is surprising how quickly we adjust our expenditures when savings are automatically transferred each month, often via direct debit. Children will also earn interest in the long term, building up their nest egg.
Investing
Many automatically associate investing with the stock market, but this can take many different forms. Whether looking at property, stocks and shares, collective investments, or bonds for income, there is much to consider. When teaching about investment, your children must appreciate the risk/reward factor and err on the side of caution in their early days.
Responsible borrowing
There is a common misconception that debt is detrimental to your financial health and should be avoided at all costs. In reality, if you respect and appreciate debt, there is no reason why it cannot work for you. For example, how many people could buy their dream home without a mortgage? It is only when debt is out of control that it becomes a problem, a lesson that all too many people recognise.
Debt management
While your children must learn responsible borrowing early on, learning debt management can also be very useful. There may be occasions when your debts are uncomfortably high, and you need to pay them down. Common sense suggests paying down the highest interest rate debt first to reduce long-term interest payments. These simple strategies can make a significant difference in the long term.
Open and frank discussions about finance
How many people reading this article grew up in a household where politics and personal finance were never discussed at the breakfast table? Historically, this may have been a generational issue, but this is not an excuse for not proactively discussing finance with your children. We live in a world where financial services now appeal to the masses, the Internet is used to discuss previously taboo subjects, and people are more comfortable discussing health and wealth.
Encouraging interaction at an early stage
It is common knowledge that children are like sponges in their early years; they can literally take in any subject that you throw at them. Surely, this is the perfect time to introduce the concept of finance and encourage them to interact, ask questions, and be inquisitive. While it may only be in their later years that they appreciate the value of money, introducing the concept early is crucial.
Saving and spending habits
The earlier you can teach your children sensible saving and spending habits, the quicker this will become the “norm” in their minds and second nature in their later years. This is not to say they won’t meander away from the path to successful financial management at some point!
Your financial legacy
It is somewhat ironic that we work to support our family and build up an inheritance yet very often fail to prepare young children and adults for managing wealth. As mentioned above, finance and politics have been taboo subjects for many people, traits passed down through the generations. Thankfully, the formal introduction of personal finance in schools and the Internet revolution have opened up this once-closed topic.
Research shows that parents who have invested themselves are more likely to teach their children about the benefits of investment. Then, your children will teach their children, and slowly but surely, a sea change will emerge in the teaching of financial awareness/management.
Learn more from your mistakes than your successes
As a side note to your financial legacy, we often learn more from our mistakes than our successes. So, it is important to discuss both mistakes and successes concerning personal finance to give your children a broader picture of the challenges. While success breeds success, awareness of mistakes is integral to the learning process.
Summary
Two issues to take away from this article are the need to introduce finance to your children at a relatively early age – building on these foundations as they grow older. There is also the need to create an environment where children and young adults can discuss and ask questions about finance. For far too long, finance and politics have been taboo subjects across the breakfast table, to the long-term detriment of children.
Children and young adults often see subjects from different angles than their parents; some of their questions may even make you sit up, listen and reconsider your approach!
If you want to teach your children about finance, please call us, and we can discuss this important topic in more detail.