Tom Henson is a senior consultant with Infinity Financial Solutions and one of KL's most sought after financial planners. Married with a young son, Tom enjoys family life and is an ace on the golf course.
One thing I have learnt in my career as a financial planner is: financial illiteracy is widespread. I have clients with high-flying jobs who are incapable of grasping the most basic concepts of personal money management. At the risk of sounding like a tiger parent, as a – relatively – new dad I have been wondering how to give my two year old son the best start in life with his financial education. Interestingly, recent research from the Money Advice Service found children’s financial habits are usually formed by the time they are seven so it is never too early to start laying foundations.
A survey carried out in the UK last year by Barclays and the Personal Finance Education Group revealed a staggering level of ignorance in under 25s on even the most basic of financial concepts. Here are some snippets:
• 42 percent could not tell the difference between being in credit or overdrawn on a bank statement.
• 13 percent did not know what an overdraft was.
• Over one third did not know the correct meaning of APR relating to interest on personal loans and credit cards.
When you consider that almost all under 25s receive bank statements and a high percentage use overdrafts, taking out loans and shopping on credit cards, it doesn’t take a degree to work out why many young adults get into financial difficulty.
Personal finance and money management are not subjects taught at school, but clearly they should be. In many societies it remains taboo to talk about money, a fact which exacerbates the problem. It is imperative that we start to educate our offspring. An ability to manage finances is an essential life skill and will become even more so as the state safety net is pulled away and we become responsible for our retirement funds.
Even a very young child can be taught about saving. Opening a bank account and encouraging them to save a portion of Christmas and birthday money is a good habit to start. They will enjoy seeing their savings grow. Setting a target for children to aim towards makes things more fun and establishes early in life the principle of saving for goals. My son currently covets a Buzz Lightyear talking toy and, while I’m hoping his saving goals will evolve, I also hope the habit of saving will remain to help him achieve more adult objectives like his first car, home and perhaps even one day a luxury yacht!
As children get older and start to receive pocket money, you can encourage them to continue saving. Introduce the concept that money is earned to older children by asking them to do chores in return. Later on teenagers and students can be encouraged to get a part-time job to earn money. Not only does this teach the value of money and give them more to spend on the things they desire, it also looks good on their CV when they are out in the competitive job market. Recruits with work experience are more desirable than those without.
With financial freedom comes financial responsibility and children need to be prepared for when they leave home – whether they are off to university, travelling or starting work. Budgeting is key to good financial management and involves choices – saving money in one area to free up money for other things. For my son, that might be a choice between Buzz Lightyear or the Fisher Price space shuttle; for a teenager it might mean sacrificing Starbucks coffee to be able to buy that outfit to wear on Friday night. Prioritising is important – the essentials (rent/bills/food) need to be covered before splurging on treats. It may sound obvious but teenagers need the obvious hammering home to them!
Understanding debt is crucial to a healthy financial life. With no-one keeping a beady eye on their spending habits, young people can quickly get into hot water if spending spirals out of control. That’s why credit cards are a big no no – that credit limit can be too tempting, especially if young people don’t properly understand APR. Encourage your children to only spend what they earn and to rely on a debit rather than credit card, spending only what they have with an agreed overdraft for emergencies.
A tiger parent I am not, but I strongly believe it is never too early to start your child’s financial education. A good understanding of the basic principles of saving, debt management and budgeting will be key to their financial wellbeing throughout their lives.