May is National Teen Self-Esteem month, designed to raise awareness about the importance of supporting young people and helping them build confidence in themselves. Ultimately, it’s about giving them the emotional and practical tools they need to grow into healthy, well-adjusted adults.
There are many ways to support your children or grandchildren during National Teen Self-Esteem month, but have you considered the importance of helping them form a healthy relationship with money?
Financial independence and resilience are vital for good mental health, and establishing good habits from an early age can have a far-reaching impact on their lives.
So, by teaching your child or grandchild some important financial lessons now, you can ensure that they meet their financial goals as they grow into adulthood, and you can rest easy in the knowledge that they are secure.
Here are five financial lessons to help your child or grandchild improve their financial resilience.
1. Budgeting their pocket money
Getting your pocket money was always exciting as a child, but you probably didn’t realise that spending a few coins on some sweets was already helping you establish your relationship with money. Indeed, according to MoneyHelper, a child’s money habits are largely formed by the age of seven.
That’s why it may be a good idea to give your child or grandchild pocket money from an early age and use it as an opportunity to teach them about budgeting. You can do this by giving them a small amount of money each week and encouraging them to consider what they want to buy and whether they need to save up for items or not.
According to Statista, the average amount of pocket money for a four-year-old in 2021 was £3.21 a week, so you don’t need to give them a large sum to see the benefits of this.
2. The importance of emergency funds
Having an emergency fund to cover unexpected expenses or pay living costs if you are unable to work may protect you and prevent excessive borrowing. But statistics show that young adults are less likely to have this important financial buffer in place.
Indeed, the Independent reports that, while the average adult emergency fund is £7,000, 18-24-year-olds are the group most likely to have less than £1,000 set aside for a rainy day.
If you can encourage your child or grandchild to get into the habit of saving from a young age, they may be more likely to have a healthy emergency fund as adults. You can do this by opening a savings account on their behalf, and many banks will allow them to manage their own savings from the age of seven.
It may also be a good idea to match their contributions to encourage them to pay more in and build their savings early.
3. How to manage wages and understand wage slips
Their first payday is a key financial milestone for your child or grandchild as it represents a significant step towards financial independence. However, they may not understand the tax or National Insurance deductions or pension contributions on their payslip.
That’s why it is a good idea to sit down with them and go through it, so they understand the difference between their net and gross pay.
Of course, if they earn just a small amount for a part-time job, they may fall under the threshold and not see any significant deductions. That’s even more reason to explain to them what might happen in later life!
It may also be a good idea to teach them about portioning their income to pay bills and set aside money in savings before they start spending.
4. The power of compound interest
Your child or grandchild is likely not thinking about saving for later life. However, you may want to encourage them to start as early as possible so they can benefit from the power of compound interest.
That’s because starting earlier often has a bigger effect than increasing the amount that they save. Indeed, figures from Equifax show that if they saved £100 a month starting at age 30, with an annual interest rate of 10%, they would have £217,132.11 by age 60.
But if they deposited the same £100 a month at the same interest rate from age 20 and stopped when they were 30, their total would be £367,090.06. So, as you can see, the power of compound interest means that those 10 years of saving earlier in life could be more valuable than 30 years of saving later.
5. Loans, mortgages and the difference between “good” and “bad” debt
According to Finder, the average personal debt in the UK reached £34,546 in 2023, an increase of £1,136 since 2022. So, now may be a good time to teach your children or grandchildren about borrowing and the difference between “good” and “bad” debt.
For example, taking out a mortgage to buy a house is generally considered “good debt” because they are using the borrowing to buy a valuable asset that may appreciate in value. Conversely, using a credit card to buy luxuries like expensive clothes or a new TV is normally “bad debt” as these are not essential items that they could sell for a profit.
Ultimately, it comes down to wants versus needs, as well as whether the purchase will contribute to long-term financial goals or not, and this is what you may want to focus on when teaching your child or grandchild about debt.
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