Financial literacy is an essential life skill, and teaching children money management from an early age is a valuable investment in their future. However, with only 2 in 5 young adults financially literate and 61% saying they did not receive financial education at school, many children are missing out on these skills. The responsibility to equip the younger generation with the knowledge and skills they need to make informed financial decisions, set achievable goals, and build a secure financial future is huge – it’s no wonder many parents are not sure where to start.
As navigating the world of family money management can be complex, in this blog we’ll take a look at the methods, tools, and resources available to help encourage financial responsibility, budgeting, and saving habits in kids. Everything from setting up an effective pocket money system to teaching responsible spending. Hopefully, by the end you’ll have some great ideas on how to teach children to manage their money, now and in the future.
As a direct lender, we know just how important learning the basics of money and teaching responsible financial habits is to ensure a healthy financial outlook. So, let’s look at some ideas for managing money in the family that you can start today.
Money Management For Kids – Starting Financial Education Early
One of the most important learnings you can give children is the knowledge and skills to navigate the complex world of finance. Starting early is key for this, and the statistics underscore this point. According to the Money and Pensions Service, less than half of UK children have been taught about money at home or in school. This highlights the crucial need for early financial education. A significant number of young people are entering adulthood without a solid understanding of financial basics.
This is where introducing money management for children from an early age, even just simple lessons, can lay a strong foundation. There are various activities such as teaching children to recognise different coins and notes, explaining the purpose of a piggy bank or savings jar, and involving them in small transactions, like purchasing groceries, that will all help mould their financial education.
The main goal is to build their confidence and understanding gradually, ensuring that they grow up with the financial skills necessary to make informed decisions, as well as set financial goals, and ultimately, achieve financial security. Think about your own financial education – would you have benefitted from learning about certain aspects of money earlier? Maybe there are still certain things you struggle with today. Keep this in mind when thinking about useful lessons you can teach your children.
The Value of Pocket Money
One of the classic and effective ways to introduce children to money management is through pocket money. As kids ourselves once upon a time, this is an exciting milestone we may remember that begins your journey and provides a small bit of financial independence. Many parents recognise its potential in teaching financial responsibility.
Giving pocket money also provides children with an opportunity to learn about budgeting and saving, either choosing to spend the money they get straight away or learning to save this up for something they really want – a difficult test of patience.
How much pocket money should I give?
Deciding on the right allowance amount can be a challenge. You want to give enough that will be meaningful to teach valuable lessons, but not too much that may overburden them. Consider their age, financial needs, and your family’s budget before settling on the amount. According to data from Rooster Money’s annual pocket money index, kids received an average of £333.84 annually, or £6.42 a week, which is an 11% increase from the previous year, with 16 year olds receiving approx. £12.75 per week on average.
Pocket money isn’t just a handout, of course – it’s a tool for teaching budgeting. The idea is to encourage children to divide their allowance into different categories – saving, spending, and even giving. This introduces them to the idea of allocating money to different purposes, encouraging a sense of financial responsibility.
Savings and Goal Setting
Teaching children about savings and goal setting is a fundamental aspect of financial education. These habits can help set the stage for a financially secure future and help them find the balance between enjoying their money and keeping one eye on long-term goals.
Saving is not about hoarding money but rather about setting aside a portion of their pocket money, allowance, or any money received for a specific purpose. Maybe they have an eye on a new toy they want, so explaining how they can afford this by saving up gradually is a valuable lesson that will be quite simple to teach and for them to understand.
This will also help with introducing specific savings goals. Setting financial goals early will help children visualise the purpose of their savings, hopefully bringing a sense of accomplishment when they achieve them. This will be especially important later in life when saving for big life goals such as a car, or a deposit on a property.
Using Savings Tools
Basic savings tools like piggy banks, jars, or even a children’s savings account are a great way to help inspire your children to save some of their pocket money. Opening a savings account in their name can even lead to teaching them about interest and the benefits of banking for when they get older and get their first job. Many banks provide this service as well as online family money management apps like GoHenry that give kids a personalised debit card and a simple way for them and their parents to track spending.
Fostering a culture of saving and goal setting early on can make a significant difference in a child’s financial future. As adults, we know the importance of patience, discipline, and the satisfaction that comes from achieving financial goals, so helping your children learn this is an essential step.
Earning Money Through Chores
Linking pocket money to chores and small jobs around the home is a common tactic parents employ, helping instil the value of work and responsibility to earn money. Of course, this needs to be done within reason and with the sole purpose of showing the value of money earned through effort – rather than just asking for money and getting it whenever you want.
The types of chores you assign should be age-appropriate. For example, younger children can be tasked with simple things like tidying their room, setting the table, or even feeding the family pet. As children get older, you can then introduce more complex tasks that align with their capabilities. You don’t want to set tasks that are too difficult to complete or overwhelming, as this will impact their motivation and confidence.
Discuss with your child which chores they are comfortable with, and what they expect to earn in return. They will learn that when they complete their assigned tasks, they receive their pocket money, reinforcing the connection between effort and financial reward. According to research by GoHenry, seven in 10 (71%) of young people believe it’s important to earn their own money, with 41% currently doing chores or ‘jobs’ for their pocket money.
Using chores to teach children about money management is a practical approach that can contribute to their overall financial education, so you shouldn’t feel bad for asking them to do some small chores – it will help them in the long term!
Teaching Responsible Spending
Responsible spending is a crucial aspect of a child’s financial education. Helping them develop mindful spending habits and knowing the difference between needs and wants is an important lesson.
If you can emphasise that ‘needs’ are essential for survival and well-being (such as food, clothing, and shelter) whilst ‘wants’ are things that would be nice to have but are not necessary, you’re on the right track. Encourage your child to think critically about their purchases and consider whether an item is a need or a want. An example is in-app purchases if they have a tablet device – teaching your child about this expense and what it represents will, hopefully, make them think twice before spending.
As well as helping them create a basic budget for their pocket money, this will teach them the value of delayed gratification. Explain that it’s okay to save for something they really want rather than making impulsive purchases on things they may not need. As studies on delayed gratification have shown, being able to do so is critical for success in life.
As they become more financially aware, involve them in real spending decisions too. For example, when shopping for groceries or clothes, let them make choices within a predefined budget. This hands-on experience helps them understand the consequences of their spending choices – something they’ll thank you for later in life.
Preparing for Financial Milestones
They’ll go through plenty of them, so preparing children for financial milestones is an essential part of their financial education. While it may seem premature to discuss long-term financial planning with children, they do grow up fast! Teaching them about these milestones early and what to expect is never a bad idea. Some of these milestones may include, but certainly not limited to:
- Opening their first bank account and savings.
- Going to university and living independently.
- Buying their first car.
- Getting their first paid job.
- Saving for a house deposit.
Financial independence comes to all of us as the years go by, so learning this fact early on will help your children be as prepared as possible. Teach them about the responsibilities of managing their own finances, including earning, budgeting, and paying bills. Discuss how they can gradually transition into financial independence – even if the ‘Bank of Mum and Dad’ will be there just in case.
Dealing with Money Challenges and Mistakes
Just like the money challenges you’ll experience as a parent, the same is true for your children. Learning from financial mistakes is a huge part of their development. You want your kids to have a healthy attitude towards money, so helping them understand the many challenges that come with it is ideal.
Handling Financial Mistakes – Explain to your child that making financial mistakes is all part of learning. If they spend their pocket money unwisely or make a poor financial decision, use it as an opportunity for growth. Discuss what went wrong and how they can avoid the same mistake in the future.
Savings for Emergencies – Teach your child the importance of saving for emergencies. Encourage them to set up an emergency savings fund for unexpected expenses. This will help them understand the value of being financially prepared and not dependent on credit.
Understanding the Value of Frugality – Discuss the concept of frugality with your child. Explain that being mindful of spending and avoiding unnecessary expenses can lead to financial stability. Encourage them to find cost-effective solutions when they face money challenges.
Adapting to Changes – Life comes with financial ups and downs. Teach them to adapt to changes, whether it’s an unexpected expense, a change in family circumstances, or financial setbacks. Instil the importance of resilience and the ability to adjust their financial plans when needed.
Helping Tomorrow’s Adults Make Better Decisions
It will be a bumpy ride with lots of twists and turns along the way, but ultimately the journey of managing money with children is a vital one. If you can focus on essential money management skills, this will pave the way for the next generation to become financially savvy, responsible individuals.
Remember that financial literacy is a lifelong skill, so the lessons you provide today will influence your child’s future. So, start early, be patient, and embrace the learning process together – it will be worth it in the end.
To help you navigate financial wellness for you and your children, there are plenty of resources out there to help. Here are just a few you may find useful:
- Money Helper has a helpful guide on how to teach kids about money.
- Go Henry – children’s money management app and debit card that also provides finance skills and advice.
- MyBnk – offers free workshops and online resources aimed at teaching financial skills to young people.
- YoungEnterprise – has free resources for both parents and teachers about teaching financial education to young people.