FOOL'S EYE VIEW
Teach Your Children Well

By David Kuo (TMFDragon)
November 15, 2001

Carburton Street, London -- One of the best ways of learning, so the saying goes, is to learn from our own mistakes. That is why most parents agree that a good way of educating children about the value of money is to let them handle their own finances as early as possible. And most parents tend to do this by giving their children pocket money.

The Wall's 27th Pocket Money Monitor, conducted by Unilever (LSE: ULVR), revealed that children between the ages of five and sixteen get an average of £3.19 a week in pocket money. This puts the average weekly spending power of children at somewhere around the £60m mark. So it's little wonder that many businesses are more than keen to tap into this lucrative, and no doubt highly profitable, consumer market worth an estimated £3b a year. And remember, these businesses have tremendous marketing might to tempt children to part with their lolly. This makes it increasingly more difficult to educate children in the importance of saving.

But try as parents may to encourage frugality and thrift, it is largely out of their control as to how their children will spend their weekly allowance. Most of us like to think of our children as sensible young adults and will therefore handle their money prudently. But saving money is not a natural habit and will only become an acquired mode of behaviour if it is repeated frequently to become almost involuntary. That is easier said than done but it can be achieved.

Start by giving pocket money on a set day of the week and stick rigidly to your timetable. This is the first step to establishing a mode of behaviour and expectancy -- Pavlov and all that! If you vary the days of the week when pocket money is handed out, it can set a very bad example to your young ones. Look at it from their point of view. If parents can't plan their finances properly, why should they? And they do have a point there. Admit it!

Deciding how much to give is a thorny issue and most parents who go down the pocket money route will sometimes wish they hadn't. Children have a habit of coming home and telling their parents that so-and-so gets more than they do and promptly ask for a raise to minimise the differential! Unfortunately, there are no right or wrong answers as to how much pocket money is appropriate, but only what is right for you and your family. But the findings of the Wall's Pocket Money Monitor does feel about right for 11 to 13-year-olds, with older children perhaps getting a little more and the younger ones a little less.

But whatever you eventually decide is right, just make sure that the amount of pocket money does not vary from week to week. Don't give them a tad more one week just because you're feeling flush, or less another when you're a bit hard up. This can punch a hole in your children's plans, especially if they are saving up to buy something special.

This leads on to the important subject of budgeting. Encourage them to budget and to put money aside for special occasions or particular purchases. Show them how to calculate the time they need to allow to save up for that purchase and how that timescale can be substantially trimmed by eliminating frivolous purchases. This also helps teach them how to prioritise their needs and is also good at encouraging patience. It is quite remarkable how that "must have" desire can fade with time.

Show them how to put some of that money that they have salted away in a savings accounts -- out of sight is normally out of mind. Most high street financial institutions have accounts designed for children and many are keen to grab youngsters at an early age. They know that brand loyalty is not just a figment of the marketer's imagination but in fact a reality. However, as a custodian or trustee of their money, make sure that you keep your eyes open for the best deals around.

Some institutions might insist on hefty minimum deposits, but Nationwide has a Smart 2 Save account for the under 12s and you can open an account with just £1. It pays interest at a gross rate of 5.2% twice a year in June and December, but to qualify for the gross rate (that is, interest without tax deducted), a Form R85 needs to be completed.

Show your children how the interest that they earn can help to boost their savings. You could be pleasantly surprised to see how quickly they latch on to the concept of compounding. And who knows where all this will lead to one day? Perhaps on to Index Tracker and Self-select ISAs. And why not?

More: Fool's Guide To Investing For Children

The author owns shares in Unilever