7 important financial lessons to teach your children from a young age

Learning how to manage your money effectively is a crucial skill no matter your goals or background.

But research reported by Money Marketing suggests that just 41% of young adults are financially literate. Of these individuals, only 29% remember receiving financial education at school but 61% stated that they learnt from parents or carers.

If you have young children or teenagers and want to ensure they enter adulthood with the required skills to manage their finances, here are seven ways to help them develop financial literacy.

1. In most cases, money has to be earned

An early lesson that your children can learn is the concept of needing to earn money before they can spend it. This will usually be the case for their income in later life, so getting a handle on the concept early on can be very helpful.

You could make a game of this – there are a whole range of board games that can make the topic of earning and spending money fun – or you could offer your children pocket money in exchange for them completing some simple household chores.

2.  Budgeting means ensuring your expenses don’t exceed your income

Learning how to budget effectively is vital for maintaining good financial health, and it’s another lesson that your children can learn from earning and managing their pocket money.

You can help your child to understand exactly how much they can afford to buy with the pocket money they have earned, and how to keep track of how much they are spending each week or month. To do this effectively, they will need to understand:

• The concept of prioritising certain expenses

• The need to save up for more expensive things

• How to tell the difference between “wants” and “needs”.

You could also include your child in conversations about your own household budget. It may not sound like the most thrilling conversation topic, but over time, it could help to cement the lessons they’ve already learnt from you.

3. Managing finances online can be very different from managing physical cash

When your child is very young, you may prefer to teach them about money using coins and notes to keep things simple. But as we increasingly move towards a cashless society, it’s important that your child is able to manage their money online, too.

There is a whole range of different types of bank accounts that you could open for your child, including:

• A current account

• An easy access savings account

• A junior ISA

• A regular savings account.

As your child gets older, you may want to introduce them to the concept of using a debit card. It’s important to help them understand that, just because they aren’t counting out and handing over coins and notes to pay for things, their online balance will still fall as they spend.

Over time, this could help your child to feel more confident managing their money themselves and enable them to make smart financial decisions.

4. Getting into a savings habit can pay dividends – literally

The conversation about saving might naturally follow your conversation about budgeting.

Sometimes, your child will want to buy something they can’t yet afford, so helping them to understand the concept of saving money for a goal could help them to navigate this challenge.

When discussing savings, it can also be a good time to introduce the idea of compound interest. This can be a complex one for younger children to get their head around, so turning it into a game could be a good way to first introduce the subject.

You could provide a small handful of sweets and tell your child that they can eat their sweet now, or if they wait for five minutes, they will get an additional sweet.

Online banking is another way that you can show your child the effects of compound interest, particularly if their account pays interest on a monthly basis. Show them how their balance can grow even if they don’t add more funds to it. This can help them to think about their savings and their financial wellbeing in the long term, building habits that will serve them.

5. There can be “good” and “bad” debts

Of course, compounding can be a good or a bad thing, depending on whether you are saving or borrowing.

While debt is something you may be keen to encourage your child to avoid, remember that there are “good” and “bad” types of debt. Helping your child to tell the difference is an important life lesson.

An example of “good” debt might be a mortgage that allows you to buy a home, provided you are able to keep up with your monthly repayments. A “bad” debt might be a credit card debt that charges a high level of interest.

By understanding how compounding works on debt, how to identify a manageable level of interest, and how to tell the difference between “wants” and “needs”, you can help your child to make smart financial decisions.

6. You won’t take home your entire annual salary

As your child gets older, they might wish to take a part-time job to help them earn more money. This is a positive step towards financial independence, but there are some important points they should be aware of beforehand.

Some people may be surprised to discover that the annual salary they earn won’t all be deposited into their bank account. To avoid a nasty surprise on payday, helping your child to interpret their pay cheque is key.

A few points to include in the lesson are:

• What a tax code is and how to check yours is correct

• What your Personal Allowance is, and how it affects the amount of tax you pay

• What National Insurance is

• How workplace pension contributions work, in particular employee-matched contributions.

When your child understands these crucial points, they are much more likely to be able to make sense of their pay cheque and be able to manage their finances effectively throughout their career.

7. Your pension is an important investment for later life

It might feel like a lifetime away, but talking about pensions and retirement savings is still important even if your child is only just embarking into their first job.

This is when your earlier conversation about compound interest could come in handy. By explaining how their pension could be invested and the opportunities for growth that compound returns offer, you can help your child to understand the value of starting to save into their pension sooner rather than later.

Any conversations about pensions should also cover the difference between saving and investing, and the inherent risk that comes with investing in the stock market. You should also stress that they won’t be allowed to access their pension until they reach their pension age – this is currently age 55 but will rise to 57 from April 2028.    

Get in touch

We hope these lessons will help your children or grandchildren to build their financial wellbeing from a young age. If you’d like to learn more about how we can help you create a financially stable future for your whole family, please get in touch.

Email theteam@fortitudefp.co.uk or call us on 01327 354321.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. 

The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.