How do we tackle the failure of so many people to really get to grips with their finances? Britons have lower levels of financial literacy than their peers in almost any other developed country according to a study published by the University of Cambridge last year. Estimates of the extent to which we are falling short of the amount we should be saving for the future range from £27bn to £66bn.
An important part of the solution to these problems is to focus on children. Research shows that people’s savings habits and attitudes to money are very often formed during their primary school years. So if you can boost your kids’ financial awareness at an early age, you’ll be doing them a lifelong favour.
How investment companies can help
In that context, a new initiative from Scottish Investment Trust deserves an honourable mention. Its just launched an online “Learning Hub”, full of educational content; it’s aimed at people of all ages but includes a series of videos made by the journalist Iona Bain, who runs the Young Money blog that helps young people build their understanding of personal finance.
In fact, the investment companies sector has a long and honourable tradition of supporting families who want to save on behalf of children. Most importantly, many schemes offer children’s savings plans, accepting monthly contributions of as little as £25. The money can be held in trust for the child, with different types of trust offering different levels of control.
Talking to children about the savings you’re making on their behalf is one way to get them interested in putting money by for the future. For example, talk through the regular updates you’ll receive from the fund manager, detailing the performance of your investments and what has driven returns. Start the conversation about what the money might be worth when they reach adulthood – and what they might want to use it for.
Such investments can also be a useful way to introduce other financial concepts, as well as helping build children’s maths skills. You’ll be able to talk about tax, for example, and basic lessons such as the importance of compound interest. You’ll be able to demonstrate the long-term value of saving even relatively small sums. Such education may be just as valuable as the investment itself.
What else can we do?
More generally, you can start to build children’s knowledge about money in all sorts of different ways. Don’t be afraid to talk to your children about what money means, where it comes from – why you go to work, for example - and what things cost. In this increasingly cashless society, children’s exposure to cash is decreasing all the time, so talking to them about what’s going on behind all those contactless payments is important.
Pocket money can be a useful part of the education process, particularly if you encourage them to earn at least some of the cash through chores or odd jobs. You can pay in cash or through one of the increasing number of pocket money apps for children, which get kids used to handling their finances online.
As your children get older, encourage them to take more responsibility. They can have their own bank account, for example, and begin to exert more control over their money. You could encourage them to save some of their pocket money each week; many apps include features allowing them to do it automatically.
The key is to get kids confident about money well before they reach adulthood. That will leave them better equipped to take full control of their financial affairs – and to make smart decisions early in life.