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How to talk to children about money

Financial literacy for kids can be taught early on in their development, but when it comes to how to teach children about money, many parents find themselves wondering where to start. A large-scale study by the UK government's Money Advice Service and Cambridge University shows that our financial attitudes and habits are set by the age of seven. And a survey carried out by M&G Investments indicates that 83% of parents know they need to teach their children about money, but one in six don't feel confident enough to do it. This article explains when and how to start building money skills with your little ones, along with some practical tips to get started.

When to talk to your children about money

It's never too early for parents and caregivers to start conversations about money. Of course, exposure to money matters will be different depending on your child's age.

For pre-school children, this could involve role-playing games such as pretending to buy groceries or getting to know the coins in your currency. By the age of seven, most children will possess the literacy skills needed to learn how much things cost and be able to play money-related games such as "Pop to the Shops"or "Money Match Cafe”. At this age, children can usually also distinguish "wants"from "needs"so they can practice real-life spending and saving with a small amount of their own pocket money.

Children between the ages of nine and 12 are usually interested in gaining even more independence, so giving them an allowance to buy their own essential items is a good step towards understanding how to budget and save for more expensive purchases. Teenagers, on the other hand, can start to understand interest rates, investments and the importance of not getting into debt.

Financial literacy is taught in school in some parts of the world, however, this varies depending on where you live. In any case, parents should start building these skills at home from an early age.

Practical tips for discussing money matters with kids

1. Be open and honest about finances

Be proactive with your child in explaining how you make money-related decisions. For example, during a shopping trip you could talk through the reasons some items are more expensive than others. Perhaps a certain item features a popular brand logo, or is of higher quality, or uses more ethical processes in its production.

Use every opportunity to explain your own values around money, for example, why you prefer to shop using local suppliers. Discuss instances in which you'd choose to pay more, such as if an item will last a long time or be passed down through family members. You might also explain when you'd choose not to pay a premium rate for something you can purchase cheaper, for example, if a brand is more expensive only because it's better known due to advertising.

These conversations should take place regularly and cover many of your family's financial decisions, both large and small. For example, why it's important for you to stay out of debt and why you therefore choose to live in a smaller house or work long hours. Whatever these conversations look like for you and your family, the most important point here is not to make money a taboo subject.

2. Model best practice financial behaviour

We know that children forge their earliest attitudes about money based on what they see and hear at home, so parents should model the behaviour they want their child to adopt. Perhaps your child watches you plan the family's monthly budget, save supermarket vouchers or wait for sales or promotions to buy certain items. Your child should also see you experiencing the consequences of money-related decisions, for example, how selling preloved toys means you have extra money for a family day out.

3. Give children opportunities to earn money

It's important for children to have hands-on experience with money before they need to make more critical financial decisions in adulthood. It makes sense for this amount of money to grow over time, as the child builds in financial confidence and also demands more independence. For example, you could offer your younger child a very small amount of pocket money each week, whereas a 12-year-old might get a larger monthly allowance to buy all their personal items. The amount will, of course, depend on your own family situation and what you deem appropriate for your child.

There may be other opportunities for your children to earn money, such as:

  • Doing chores around the house for cash.

  • A first job (for older children).

  • Financial rewards to celebrate a birthday, or success in an area of their life (for example, at school exams).

  • Selling items they no longer use.

If you decide to link a financial reward to a certain kind of behaviour, such as passing an exam or completing a household task, you must define in advance exactly what's expected of them. For example, if they wash the dishes after dinner each night they get €5 per week.

Also, introduce the concept of spending versus saving and how short-term decisions impact longer-term goals. For example, if a child wants to save for driving lessons, they need to sacrifice some of their monthly income. You may also want to discuss giving to charity if that's important to your family. Perhaps you could help your child agree on a percentage split for any income they get, such as saving 50%, spending 30% and giving 20%.

4. Open an account with your child

Many banks offer accounts for children that don't require a fee or a minimum balance, so you could help your child to open a bank account at an early age. They can then practise depositing and withdrawing money. Or you could go even further and open a savings account with them, to teach the benefits of putting money aside and to explain in real terms how interest rates work.

By opening bank and savings accounts, you're also able to introduce the concept of virtual money. Visual aids are helpful here - even when they can't physically see and touch their money, your child can check paper statements or log in to an app to understand how their savings are growing.

5. Embrace mistakes

Be at peace with the fact that your child will make money mistakes. They might spend all their monthly allowance two days after receiving it, meaning they can't buy anything else for the rest of that month. Allow your child to make these errors and avoid the temptation to preempt or correct them, or remove responsibilities. It's better that they learn these lessons with a limited budget during childhood, rather than get into money difficulties as a young adult. And when your child makes a financial slip-up, you have the opportunity to talk through what happened and help them make a plan to avoid a future mistake.

It's never too early to start teaching your children about money

We know that children who have been encouraged to discuss money matters from a young age are more likely to make better financial decisions when they grow up. By regularly talking to your child about money throughout their childhood, you're setting them up for responsible spending in the future. And if you haven't started these conversations with your child yet, then now is the best time to start.

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This information is correct as of 30 November 2021. This information is not to be relied on in making a decision with regard to an investment. We strongly recommend that you obtain independent financial advice before making any form of investment or significant financial transaction. This article is purely for general information purposes. Photo by olia danilevich from Pexels.

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