How can you teach teens about money?

Financial planning and children are not two concepts you would traditionally have put together – but in a world where getting on the property ladder requires many years preparation, and thinking about retirement savings needs to happen earlier and earlier, we shouldn’t be leaving it until adulthood to start educating young people about financial matters, or indeed to start saving on their behalf.

Starting savings on your children’s behalf from any time after they are born can pay huge dividends, for example, starting a pension at birth and paying in the maximum allowed contribution (£3,600 gross, £2,880 net per annum) until they are 18 – and then stopping – would give the young person a pension pot worth over £202,000 by the time they were 67. 

How can you teach teens about money?

The best way to teach your teen(s) about money is to start communicating.  Talk to them about your own financial responsibilities: explain what a mortgage is, how you manage your income against expenditure, household bills, tips on budgeting, planning, savings and even investing.

When your teenager needs new shoes, textbooks, or money for an upcoming school trip, sit them down and demonstrate how you budget each month, and what the net result of that specific expenditure means for the remainder of the month and beyond.

Here are some specific suggestions as to how you could teach them about the financial realities of life:

• Give them some actual responsibility around money.  That could be a weekly/monthly allowance to buy clothes or lunch money for school; you could allocate chores where they will be rewarded after completion.  After all, in the adult world, we all must work to earn a wage.
• Take them food shopping to make them aware of the costs of branded goods versus the budget range. Try doing a ‘taste test’ and purchase both items, so they can judge for themselves if the additional cost is worthwhile.  Shopping with them will also help when demonstrating the cost-saving between single items and multipacks.
• Teenagers often want the latest mobile phone or fashion trend.  Explain that these trends come and go, and the latest mobile phone often has similar functionality to its predecessor.  Talk to them about the things they want to spend their money on and ask them if them if they really need – or indeed want - it, or would they be better off saving that money for something they really want down the line.
• Teach them the difference between spending money you have available and buying on credit. Explain how borrowing works, and how bad debt could impede on their ability to buy a home/car in the future, due to a poor credit history.
• Get them interested in saving/investing their money; either in the short-term for a treat, or long-term for something more significant, such as their driving tuition, or first car.  Explain interest rates and how they work.
• There are some good apps, which come with a pre-paid debit card.  These apps are there to guide, motivate, educate, and nurture your child to be financially healthy.

Which works best for younger teens versus older teens?

However old your children, the more you can talk, the more they will understand and grasp basic concepts of earning, spending, saving, and giving money.

With younger teens you can discuss the basics of saving/investing, credit, debt, interest rates, budgeting, and identity theft.  As they get older, you can introduce the basics of income, payslips, good versus bad debt, credit scores, credit agencies/checks, and income tax.

There are a range of online applications out there for you to explore and some high street banks offer children’s bank accounts from the age of 11, in which they will have access to their own online banking application and debit card.

What can I do, to give my child a head start?

It is never too early to start saving for a child’s future, and the sooner this starts, the bigger the opportunity for those savings to turn into a meaningful amount which could help that child buy their first house, or even create a foundation for a comfortable retirement.

A good example, and one which many people do not realise is possible, is to open a pension for a child when they are born.  If the maximum annual contribution is made each year until the child is 18 (£3,600 gross, £2,880 net per annum), even if no further contributions were made after that, by the time the child reached the current state retirement age of 67, the fund would be worth a staggering £202,000.

For parents and grandparents, there are a number of ways that they can invest right from the moment of their children’s or grandchildren’s birth, each of which comes with their own set of benefits and drawbacks.

Junior ISA (JISA)

• Invest up to £9,000
• No tax payable on interest or investment growth
• At age 18, automatically rolls over into an adult ISA, at which stage the beneficiary can access the funds

Premium Bonds

•  Chance to win cash prizes (paid to parent)
• Invest from as little as £25 to a maximum of £50,000
• Child can access the bonds from age 16

Cash

• Access at any time
• No limits on gift amount (larger gifts may be subject to Inheritance Tax)

Trust

• Access is ‘gated’ by trustees
• No limits on gift amount (large amounts may be subject to Inheritance Tax)
• Can be accessed at any time for the benefit of the child(ren) (for example for education fees)

Pension

• Invest up to £3,600 gross per annum (£2,880 net) each tax year
• Amount falls within annual gift allowance
• Tax Free Growth
• Access at retirement (from 2028 this will be age 57)