Good financial habits ideally begin before the age of seven, but your children’s financial education should evolve as they grow and develop. It’s important to help them develop a sophisticated relationship with money at their own pace, so that they can be self-sufficient on entering the workforce.
How can we promote a positive attitude towards money among our children and prepare them to be financially responsible adults on leaving the family nest? After explaining the importance of starting early and giving some tips for the early years, myLIFE explains how best to guide your children step by step towards financial independence.
By familiarising your children with the basics by the age of seven, they’ll be able to see that money is a means to an end and not an end in itself. At this stage you should help them differentiate between wants and needs, and between the short and long term. In other words, it’s not just a question of saving, but of planning and budgeting as well.
The challenges involved are clearly set out in the UK government’s Strategy for Financial Wellbeing, a programme which aims to provide financial education to over two million young people by 2030. According to the programme, a solid financial education is about:
- increasing confidence to talk and learn about money;
- improving knowledge and understanding of financial terms and products;
- increasing confidence about managing money;
- improving skills to keep track of accounts;
- encouraging the use of bank accounts;
- strengthening the ability to read bank statements and other financial documents;
- showing how to save, rather than spend in the short term;
- increasing the frequency with which we save;
- improving budgeting and management skills.
But how can we achieve this? How do you make children want to learn about managing their finances? Creatively and with a pedagogical approach, rather than in an authoritarian manner. Abruptly introducing numbers and complex terms doesn’t really appeal to teenagers who prefer to use their pocket money to have fun. It’s important to show legitimacy and speak to them in the right tone, so that they don’t reject good advice before they understand it.
It’s very difficult to force someone to take information on board and act accordingly if they don’t first see how it benefits them personally.
The right motivation…
Behavioural science has shown that it’s difficult to force someone to take information on board and act accordingly if they don’t first see how it benefits them personally. To get young people to take an interest in finance and budgeting, we need to identify their desires and aspirations, and use them as a springboard towards a constructive dialogue about money issues.
Whether it’s a new bike, the latest games console or a future trip with friends, start with what grabs their attention rather than abstract talk about the need to budget. Similarly, avoid time horizons that are too far off. Telling a 12 year old that they need to save to buy a car when they’re 18 makes little sense to them.
Your child will only listen to you about the virtues of saving and good budget management when finances are linked to a concrete project or desire. You should be saying something along the lines of: “You have a project. You need to find how to make it happen. I can show you how to manage your money and make the right decisions”. But there’s no guarantee at this stage that they’ll listen to you. The right motivation isn’t enough… you also have to be the right person to talk to.
To be listened to, the speaker must be considered legitimate and credible by the listener.
… and the right person to pass the message
Behavioural economics highlights the importance of the messenger. The messenger must be both legitimate and credible. Legitimate in the sense that the child or young person recognises the speaker’s right to discuss their life in general. Credible in the sense that the speaker should follow their own advice and shouldn’t have intentions that could be seen to conflict with the listener’s interests.
For a teenager, receiving advice from parents is legitimate, but not always credible. What’s more, it may be seen as an order rather than well-meant advice. For your child to accept a message and take it on board, you need to identify the right messenger, a role model your child can identify with. This could be a parent, a friend, or even a well-known personality or figure of authority.
In 2021, the Financial Times launched a major project to promote financial education among young people and adults. The newspaper asked certain well-known personalities to speak about their relationship with money. For example, there’s an interesting article by Courtney Love, rock star and widow of Nirvana frontman Kurt Cobain. Far from the financial wellbeing her family should have enjoyed thanks to the income generated by her husband, she explains how they’re instead on the verge of bankruptcy due to a lack of financial education. This lack of financial education made her give too much freedom to people around her who took advantage of her lack of knowledge to squander or simply steal her money.
Acknowledging that her situation wasn’t unavoidable, she insists on the importance of learning to manage money early and names other celebrities who take good care of their finances, including Lenny Kravitz, Bono or even Dave Grohl, another member of Nirvana.
Make sure your children are influenced by public personalities who provide a good example.
Don’t just ask about your children’s hobbies; get to know their role models as well. Make sure they’re influenced by public personalities who provide a good example.
Learning at different ages
In addition to the main principles outlined above, it’s important to adapt your teaching about money to your children’s age. Here are some points to bear in mind:
7 to 10 years: get into the habit of saving
At this age, the most important thing is to get them into the habit of saving. By encouraging your child to regularly leave money in a piggy bank or savings account, you’ll have the chance to discuss short- and medium-term goals with them. It’s also important to show tangible evidence of growth in their savings, so it’s a good idea to have them put money in a piggy bank and watch the bank gradually fill up.
10 to 13 years: actively managing savings
The pre-teen years is the right time to start talking about budgeting with your child. They’ve already seen the value of delayed gratification, i.e. saving for higher-cost pleasures in the longer term. But this is essentially a passive observation that ‘only’ requires patience. Now they have to gradually learn to actively manage their pocket money by setting small goals with different time horizons.
13 to 16 years: learning to manage digital currency
At this age, your teenager is already more connected than you are. It’s important to make sure they understand the difference between cash and credit (especially credit cards). In the age of digital currency, mobile apps and in-app purchases, it can be difficult to keep track of spending. The payment methods you use influence your spending habits.
To help them better understand the concept of ‘credit’, show them your credit card bill, tell them how interest works, and explain why you have a credit card and the importance of making payments on time, or paying off the balance each month.
It may be useful to help them learn about the mobile apps linked to their bank account and about budget management. You should also help them set savings targets and identify the opportunity cost of impulse buying and necessary purchases.
Make it a point to regularly review and discuss your spending behaviour.
16 to 18 years: get them into the habit of watching their money
Consider introducing your teenager to an educational or practice investment portfolio and work with them to research, select and monitor their investments. Emphasise the importance of only spending the money they have and make a point of regularly reviewing and discussing your own spending behaviour.
To prepare your teenager for independence once they leave home, gradually transfer responsibility for managing certain types of spending, whether through cash from savings, allowances, pocket money or a summer job. Establish a monthly or quarterly routine to review mobile phone bills and other school or food expenses with your teen.
18 to 23 years: on the road to financial autonomy
Whether studying abroad or getting their first job, this stage of life marks an important transition in which your child typically gains greater financial and personal independence. During these years, further financial learning and the development of money management skills should help them towards a more independent lifestyle. At this stage, it’s essential that your child understands the importance of using bank accounts in a structured way so that they can keep track of their money and manage it effectively.
You can encourage them to set up a monthly direct debit from their income to cover their expenses and to gradually increase their credit card limit as their circumstances change. Also consider helping them draw up a comprehensive budget to manage their education costs and day-to-day expenses, so that they have a clear idea of the relationship between what they spend, and what they need and want. The fact that they’re still living with you is no excuse for putting this off.
Lastly, explain how to create and manage a detailed budget by recording short- and long-term financial goals (e.g. a new phone, a new car, a house, further education). In general, it’s important to encourage discussion about dreams and goals, and about how budgets are essential to achieving them.
Time to get to work!