In June 2020, the Scout Association announced the release of its first new badge in more than three years. Offered in partnership with HSBC, the Money Skills activity badge is aimed at cubs and beavers, providing valuable financial lessons to those between 5 and 10 years old.
This might seem young, and yet research by the Money Advice Service back in 2013 confirmed that kids develop financial habits as early as age seven. What’s more, these habits are adapted from a number of influences, including parents, peers, and teachers. With habits forming so early, it’s vital they are good ones.
This is even more true in light of last month’s report from the Public Accounts Committee (PAC) that warned of a growing number of young people who can’t afford to plan for a proper pension and are therefore opting out of their workplace scheme.
Here are five important lessons to teach your child or grandchild.
1. Understanding the value of money
Cubs and beavers looking to attain their Money Skills badge will need to show that they can identify the value of different coins and explain the way we spend money today. From Apple Pay to cryptocurrency, the financial landscape is vastly different to how it would have looked even 10 years ago.
But understanding the value of money – the fact that it must be earned and that it can run out – is as important as ever. You might consider offering cash incentives for chores such as washing the dishes and mowing the lawn or making them a proviso of receiving pocket money.
2. Learning to budget
Whatever age your child or grandchild, understanding the balance of savings versus spending is a vital part of learning to manage money effectively.
Breaking down expenditure into needs, wants, and savings is key at all ages. The 50/30/20 technique is a great way to teach this. You might consider upping the allowance of a smaller child and then explaining that the new amount must cover “needs” such as school clothes or lunch money, as well “wants”, while leaving enough to put some aside for the future.
For older children – whether enjoying their first taste of social freedom or struggling to manage a student loan – the same principles apply. The earlier a good savings habit can be formed the better.
3. The importance of an emergency fund
The coronavirus pandemic made clear the importance of having a rainy day fund. The unexpected can strike at any time and a safety net is crucial to keep your child and their loved ones financially protected.
It is never too early to start building one.
Normally, this should total between three to six months of household living expenses, but for a younger child, it might be enough to cover new books or to replace a school uniform. For an older child, the emergency fund becomes vital to cover unexpected costs such as a car breakdown.
4. Investing in a pension and saving for the future
Saving for the future is a vital lesson to teach children and this means understanding the difference between saving and investment.
A pension investment and savings product such as an ISA has attractive tax benefits. Tax relief on pension contributions is extremely valuable and the gains on a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT). A child must understand the risks associated with investment too – that their funds can go up as well as down and that investing is a long-term proposition.
Arguably, one of the biggest benefits of saving and investing is the effect of compound growth, and this is most profitable when money is put aside early.
You might consider contributing to a pension in your child’s name or setting up a Junior ISA that can be converted into a full ISA at age 18. In light of the recent PAC report, explaining the value of a pension early in life could make a real difference as your child grows up and enters employment.
5. Understanding loans and mortgages
Loans and mortgages might seem complicated to a young child but understanding them becomes increasingly important as children get older. Budgeting with – and understanding the implications of – a student loan, for example, could prevent the Bank of Mum and Dad from needing to step in.
Later in life, the mortgage advice you share now could make an enormous difference to how your child approaches owning a property.
Get in touch
Managing money is a crucial part of all our lives and the way we go about it could be decided by the actions we take and see around us as early as aged seven. It is clearly never too early to start instilling good financial practices in your children.
Speaking to the experts can help too so get in touch if you’d like to discuss any aspect of your financial plans, including how you might help children or grandchildren become financially secure.
Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss any aspect of your estate.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
