The Group Hug Expert
How can you ensure your children will always be able to stand on their own two feet and not rely on a spouse? Do you want to help your offspring to become financially confident and independent in the future?
Here’s our tips:
Saving patiently
Patience is a vital lesson, and one that means your children will be more likely to achieve a long-term financial goal. It is key to teaching them to budget properly, save money and not spend everything all at once, creating a positive habit for the future.
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It can also ensure they do not take a short-cut to their goal by using credit cards – something that could result in expensive interest charges if they don’t clear the debt in full.
Encourage your children to see saving as the cornerstone of good financial planning. Saving for a goal avoids potentially high interest rates of credit cards or loans, so help then to set a goal of buying something that is expensive for them, but not impossible. Not only will they learn to save, but they will also learn the importance of perseverance, and the satisfaction that comes with achieving a goal.
Budget
By regularly assessing income, outgoings, savings and debts, your children will learn to budget effectively and have the confidence to deal with her own financial situation going forward.
Be open when talking about money
Money is often a taboo subject around the dining room table, which can result in your children learning about money and finances from the internet or their friends. This could mean that they are learning from people who do not have their best interests at heart, or from those who already have a difficult relationship with money.
Being open, and encouraging your children to talk freely about money and addressing any concerns around it, will ensure they are learning from the very people who put their welfare first. It can help your children to become confident and empowered when it comes to their finances.
Emergency fund
Teach your children the importance of building an emergency fund. As the last 12 months have shown, life can throw unexpected curve balls at all of us from time to time, and not having a financial safety net could create major financial problems for your children in the future.
Being financially independent means not relying on others if an unexpected event happens. We at Finance Lab always recommend clients have between three to six months’ total expenditure in savings, as well as insurance to protect against long-term illness, accidents, or loss of income.
Never put “all your eggs in one basket”
In the world of finance, diversification is key. This means not putting all your money in one place, be that a single high street bank or investment.
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This means a financial “shock” is less likely to have an impact as your money is spread out over a variety of providers and investments. If your money is in one place that is hit hard by a financial shock, the results could be dire.
While you may start by encouraging your children to use more than one savings account, later in life they could diversify through investment and banking providers, types of investment and tax-efficient savings.
Money is earned
A key lesson is that money has to be earned. While it may sound obvious, giving large allowances or paying for your child’s lifestyle may teach them to depend on others for money and the things they want to buy.
Encouraging your children to work for their money will not only create a positive work ethic; it will also teach your children the value of money and make them feel financially confident. I heard a story recently about a teenager who started work and stopped buying coffee and muffins at a café near her home when she realised it cost nearly an hour’s earnings!
Understand compound interest
Dubbed the “eighth wonder of the world” by Albert Einstein, compound interest is where you earn interest on the interest you have already built up. Over time this has the potential to dramatically increase the earning potential of your investment or savings, as the following example demonstrates.
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For ease of maths, you invest £20,000 into a product that pays 5% interest. In year one you will earn £1,000, boosting your savings to £21,000. In year two, you receive 5% of £21,000, which is £1,050, taking your savings to £22,050. This carries on, meaning in year five your initial investment has grown to £25,525 through compound interest alone.
Invest in a pension as young as possible!
Discussions around retirement may seem like a strange thing to do when your children are teenagers and many young people fail to grasp the importance of investing in a pension as young as possible.
Many of those we speak to are surprised when we tell them that there is no minimum age for contributing to a pension, and some parents contribute to their child’s retirement when the child is still a toddler.
As your children start to go out into the world of work, it is an ideal time to look at potentially contributing towards a pension over and above their workplace pension. This can have several benefits:
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- Your children can have more control over how and where a personal pension is invested, which may expose the money invested to greater potential growth.
- Subject to the relevant tax rules, they will get an uplift of 20% from the government, meaning for every £100 they contribute to a pension, it will cost them £80 if they are a basic-rate taxpayer.
- If they boost their workplace pension, the employer will also be contributing, meaning your children get an uplift from the government and the employer.
- The younger you start, the less you need to contribute to get the desired income in retirement due to compound interest, as explained above.
While pensions can be used to reduce tax through the likes of salary sacrifice, there are complex rules for taxation. Investing in pensions can also carry risk as well as returns, so always ensure your children speak to a professional financial planner about pension options.
Use tax-efficient investments and savings
ISAs, Premium Bonds, and pensions can offer tax advantages, so teach your children what they are and how to use them. One way to do this may be to allow your children to sit in on meetings with your professional adviser, so that they can fully explain how tax-efficient investments work, as well as the risks and rewards associated with them. Start to get them used to the language and terminology so they feel financially confident.
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Speak with a professional financial planner
Help your children to understand the value of speaking to a professional financial planner, who can help them to understand the opportunities and risks involved with money.
Having an expert that your children can speak to ensures they can discuss their concerns with a trusted planner and is less likely to make a financial decision they may later regret. As part of our service at Finance Lab we regularly educate our client’s children and grandchildren by discussing money, finance, and tax.
For us, this is at the heart of financial planning, as it involves future generations in your long-term strategy. At the same time this unbiased knowledge helps your children and grandchildren to make better informed decisions about their finances.
From building an emergency fund, to achieving your financial goals or protecting your loved ones, The Finance Lab can provide you with peace of mind about you and your family’s future.
Thank you to Rajesh Modha of The Finance Lab for this very useful blog about the importance of raising financially confident children. Rajesh features in The Hug Directory and you can get in touch with him HERE
Please note: This article is for information only. Please do not act based on anything you might read in this article until you have sought professional advice.
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