Cross-party MPs and campaigners are trying to get personal finance added to the national curriculum, but until they succeed many children and teenagers will rely on their parents to teach them everything they need to know about money.
Alvin Hall, the money expert who recently starred as the mathematics teacher in Jamie’s Dream School on Channel 4, says that even when children are taught about finance at school it is crucial to establish a healthy attitude towards money at home.
“One cannot look to curriculum alone to help kids learn about money. Money is, for most children, emotional and it is for parents to provide the right emotional context. It is not just about learning the numbers, it is also about the emotions that children have surrounding those numbers, which parents often don’t recognise.”
Mr Hall, author of Show Me the Money, a book for children about finance, suggests that pocket money should be linked to accomplishments, such as doing well at school, with additional money given when targets are met.
According to research by Halifax, two thirds of children earn part of their pocket money by doing chores, such as tidying their rooms, washing up or cleaning the house. But Mr Hall says it is important that parents view this as not purely spending money. “It is also their first lesson in how to save,” he says.
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While very young children will not fully understand the concept of saving, the idea of accumulation is much more familiar.
Mr Hall says: “Parents will always say their kids understand about saving. They don’t. They understand about accumulating dolls, accumulating toys; that is a natural progression for a child.”
If a child is trying to raise the money for a particular item, Mr Hall suggests offering to match that child’s savings according to a pre-agreed plan. He says that it is imperative that parents do not cave in and hand over the necessary cash, as children find great satisfaction in attaining goals. By being firm, parents reinforce the key message of living within one’s means.
It is a good idea to use everyday activities, such as shopping or planning for a holiday, to teach children about money. Mr Hall says: “You can give children calculators when you go to the supermarket and say, ‘Here’s how much we have to spend on groceries’ and make them think about what items they will have to put back. [This way] children become much more accurate shoppers.”
Mr Hall says that, likewise, when planning a holiday the family should sit down together to work out a daily budget, to which everyone must adhere. “Establishing clear limitations is something that children respond to if parents are consistent. If parents are inconsistent children will quickly figure out a way around it,” he says.
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Financial worries can often be the source of relationship problems and trying to protect children from this can add to the strain on the family.
Mr Hall says that it is not a good idea to involve children when there is an ongoing gripe between a couple about money, such as one partner spending too much. However, when the issue is a loss of income due to illness or unemployment, it is better to keep the whole family informed. “Often [children] will be the ones to come up with solutions that don’t involve the emotional issues that parents are involved with.”
Mr Hall says that by explaining to the children that times are tough and anything they can do to help out is appreciated, it can bring the family closer together. Mr Hall believes that children will not grasp the concept of debt until they are in their teens. However, it is important for them not to pick up bad habits at an early age. “The one thing that you don’t want to do is to lend them money against future pocket money. That teaches them that they can always have money now.”
He says that you can do this once they are teenagers, but that it is crucial to configure a repayment plan from the outset and that you do not write off the loan.
Jonathan Self tackles debt and interest rates in his book The Teenager’s Guide to Money (£7.99, Quercus). He says that teenagers should learn to never borrow a penny more than they absolutely have to, because in so doing they are sacrificing future income. “The average Briton spends £100,000 or more on loan interest over the course of his or her life. Credit cards should really be called debt cards.”
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Mr Self says that it is crucial for teenagers to understand interest rates and to learn not to be complacent about a fraction of a percentage point’s difference between two deals. “If there is one area of personal finance where consumers regularly get ripped off, it is that of interest rates. They accept too little when they invest and pay too much when they borrow.”
Mr Self says that when teaching teenagers to budget and develop a savings habit it is worth making the point that when you borrow money you pay a double price: the cost of the loan plus the cost of not being able to earn interest investing the same money.
But he says that because of the impact of compound interest, saving even a small amount can add up. A teenager saving £1 per day from his or her 18th birthday could have as much as £118,000 by the time he or she reaches 60.
Other key lessons for teenagers include the need to shop around and to avoid waste. Mr Self says that he finally managed to get his own children to appreciate the cost of leaving lights and appliances switched on unnecessarily by offering to share any of the savings made with them.
Another key message to get across is that not looking after money carries a heavy cost, while being careful with money brings with it more freedom.
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Government to launch Junior Isa
The Government has revealed plans to launch Junior Isas from November for children under 18. The tax-efficient savings accounts will be offered by high street banks and building societies, and allow children to save up to £3,000 a year in cash or stocks and shares.
Junior Isas will be open to all children who are not eligible for a Child Trust Fund (CTF), which means those aged over 8½ and those born after January 3 this year, when CTFs were closed to new applicants.
Unlike CTFs, Junior Isas will not receive a government contribution. The annual contribution limit for children who already have a CTF will be raised from £1,200 to £3,000, in line with Junior Isas, to ensure that they are not penalised.
The Treasury expects six million children to qualify for Junior Isas when they are introduced, with a further 800,000 becoming eligible every year after that.
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Children will not be able to access the funds in a Junior Isa until they reach 18, when the account will automatically become an adult Isa.
Danny Cox, of Hargreaves Lansdown, the independent financial adviser (IFA), says: “Junior Isa has the potential to be the most successful children’s savings scheme of all time. If parents save £3,000 in a Junior Isa every year from [their child’s] birth until age 18, assuming a 6 per cent return they could give their child a coming-of-age present of £95,730.”
Kevin Mountford, of the price comparison website Moneysupermarket.com, says that parents should shop around for the best rate and switch deals when necessary to maximise returns before their child reaches 18. “With the substantial costs of university tuition fees at that milestone, it is important that people are encouraged to save for the future.”
Patrick Connolly, of AWD Chase De Vere, another IFA, says that it is crucial that investment groups back the product to ensure that parents have a good choice of funds.
Case study
‘I hope to make my first million by 18’
Phil Smith, 42, is a hairdresser from Salisbury with his own eponymous brand of styling products. He says that his son George, 13, has taken on his entrepreneurial spirit.
Mr Smith, pictured with George, left, says that he has bought him lots of expensive toys over the years, as he has re-lived his childhood through his son, but when George tires of the gadgets he sells them on eBay. George has saved up £15,000 as a result.
Mr Smith has matched this and together they plan to put down a deposit on a buy-to-let property. “We have our eyes on a new-build property in the area and have registered our interest, but we are waiting for the price to come down a bit. I am trying to teach George that you shouldn’t rush in as I want it to get cheaper.”
Mr Smith says he has explained to George the risks of investing in property. “I’ve explained that it is rare to make a quick killing but that over time, if you are prepared to sit on it, you can make money.”
He has also given George an equity stake in a new product range for teenagers that he is planning to launch soon.
George says: “I have been helping my dad out with it by telling him all about what teenagers want.
“I’m hoping to make my first million by the time I am 18.”
George plans to take business studies when he reaches GCSE age and hopes to charter a boat for a living.