What children learn about money in childhood will shape their own attitudes and behaviour later on. By instilling a few basic principles early on, you could help influence for the better how they manage their money in adulthood.
Your aspiration needn’t be to try and nurture the next Warren Buffett. Much like teaching a child basic DIY can save them money when they move into their first house, enabling them to make better financial decisions could endow them with a good head start.
Learning a valuable lesson
There are plenty of better ways to spend a childhood than rummaging through the financial pages. Worrying about money should be the preserve of adulthood.
Yet learning the value of money from an early age can pay off handsomely. Part of the power of pocket money is, of course, understanding the value of earning a pound and what it will buy. Learning the importance of saving is imperative.
Research by the Money Advice Service has found that many of our long-term money attitudes and habits begin to form by the age of seven. According to the charity, children who are encouraged to talk about money, who are given money regularly and given responsibility for spending and saving, tend to do better with money when they grow up.
Since gaining an understanding of money while growing up gives children a better chance of managing their finances well in adulthood, it follows that introducing the basics – and instilling an interest – early in life could prove a worthwhile investment over time.
The power of games
The most engaging – and effective – ways for a child to learn some financial basics will probably be through games. With a little healthy competition and a sense of fun, powerful concepts can be conveyed.
Take family favourite “Monopoly”, for instance. Setting aside its potentially unparalleled capacity as a board game to inspire high emotions and ruthless tactics, the trading game is a terrific example of how an interest can be stirred in the fundamentals of investing.
A keen young Monopoly player will quickly pick up on the concept of return on investment. For instance, which is the better property to buy: Mayfair, costing £400, or Old Kent Road, at £60? Given, as the owner of Mayfair you would receive £50 in rent each time another player lands on the square, compared to only £2 for each visit to Old Kent Road, the former is clearly a better investment given a straight choice.
While very few children would ever dream of running the numbers – owning the Mayfair property delivers a yield of 12.5% per visit, versus 3.3% for Old Kent Road – they can develop a valuable intuition for what makes better financial sense.
Nurturing a budding interest
If a child develops an interest in investing, there are a number of ways it might be harnessed. Many schools participate in student investing and finance challenges that take all manner of guises, but are often team-based to encourage collaboration with peers.
Something that you could do at home, and for free, is set up a dummy trading account. You could, for instance, each pick 10 shares listed on the UK stockmarket at the start of the year and manage your accounts over the year, along the lines of managing a fantasy football team. Important lessons – not least how the value of investments goes down, as well as up – can be learned along the way.
Admittedly, like any of us, a child might take more of an interest if their own money is on the line. If they have a Junior Individual Savings Account (ISA), and you are responsible for managing it, why not encourage them to play a role in the process?
While a child can only access their money from the age of 18, they can take control of their account from 16. By talking it through with them before they come of age, discussing your choices and the options on offer, they will be better equipped to make their own investment decisions when they take the reins.
With interest and a little knowledge, we all stand a better chance of making better long-term financial decisions and, therefore, of realising our ambitions.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
It is important to remember that the value of investments and the income from them will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
Please bear in mind that ISA and Junior ISA tax rules may change in the future and their tax advantages depend on your individual circumstances.