It might seem a bit odd writing about teaching children how to handle money when I haven't got any of my own. Kids, that is. Nor money, for that matter...
But I was trying to figure out why my husband is so good with money and I was always so bad. Having adopted Foolish principles in recent months I'm now in pretty good financial health, though the tendency to shell out for something when I haven't quite got all the necessary pennies to pay for it still rears its ugly head every now and then. These days my passion is usually shares though -- rather than other things.
Anyway, we came to the conclusion that, as a five-year-old, my husband had actively been taught by his mother that when it's gone, it's gone. I was never actually taught that fact and, at that age, was renowned for nicking the odd sixpence for sweets from my mother's purse when she was looking the other way. Thankfully my kleptomania was generally confined to my family and it wasn't a long-lasting problem. I just grew up learning that the easiest way to get more money when I wanted it was to borrow it -- from the bank!
Anyway, since the Government is planning to make personal finance a subject on the National Curriculum this September, it seems an appropriate topic to put on the kitchen table. So far, there have been no details about how children are to be taught and there appears to be some concern among teachers that the Government may not even get its act together in time for it to be introduced at the start of the next school year.
I've no doubt the Miracle of Compound Interest will be on the agenda, but unless children are able to handle money for themselves, they'll only end up knowing just the theory. After all, it's all very well being told that if you mix two particular chemicals together you'll get smoke, but I suspect children need to try out the experiment for the concept to fully sink in.
So really, it's still going to be up to the parents to help their children put the theory into practice and the only way to do that is with a decent amount of pocket money and, when they hit their teens, a proper allowance. I say a "decent" amount because too little is not going to encourage a child to learn to save. It certainly didn't with me and I sometimes wish my parents had had access to the sort of financial parenting information that's available these days -- I'd certainly be a lot richer (Sorry, Mum!)
From what I've read it seems there's no other way of learning how to manage money unless children have a regular income out of which they can save as well as buy. Not just the fun stuff, but some necessities too. And in true Foolish fashion, it appears the sooner you start the better -- though we're probably looking at the six- or seven-year-old rather than the three-year-old. Mind you, with the latter there's no harm in helping them learn their sums by spreading the coins and banknotes of the realm on the floor -- just so they get used to handling this stuff that governs our lives to such a great extent.
Obviously, what the allowance money should be used for depends on the age of the child. A five-year-old can certainly put her 20 pence into a piggy bank and understand that she has to use her own money to buy something you don't want to buy for her. But you wouldn't make her responsible for buying her own clothes at that age. On the other hand a thirteen-year-old with her own bank account should be perfectly capable of deciding whether she wants to use her money on the latest top from New Look or a new haircut. And if your seventeen-year-old wants to drive a car, she needs to learn the financial cost of doing so.
So, if they want something, make them save up for it. With the five- to seven-year-old, toys are always a good start. Something small so that they can save up enough over just two or three weeks -- or if it's a slightly more expensive item (for them) then offer to go halves. You'll probably win in the long run because you won't be reaching for your purse every time your child has a tantrum in the toy shop and she will learn to stop demanding that you buy them stuff.
Make sure that the amount of pocket money -- or in later years, their allowance -- is always paid on time. Keep to your side of the bargain. After all, your boss doesn't pay you whenever he or she happens to remember and your children shouldn't be given the runaround either. Knowing they have a certain amount coming their way every week helps them to plan. And as they get older, open a bank account for them so they can learn about paying in and drawing out cash.
One method that parents often use to teach their children about money is to pay them for doing the odd chore around the house. It appears it's debatable whether this is a good thing or not because you are really linking two separate issues. On the one hand you give them chores so they learn to be a responsible member of the household while the pocket money or allowance enables them to learn how to manage money. Do you really want to hand out 50 pence every time your 10 year old empties the rubbish? The same goes for withdrawing pocket money as a punishment for not doing the chores.
Perhaps the method would be better used when the child needs to earn some extra money for a special item and is willing to do over and above the usual around the house in order to achieve their aim.
Finally if you really want to get your children interested in money, try setting them up with a virtual online portfolio at The Motley Fool. One of our regular posters did just this with his family as a competition. Each of them had a virtual portfolio with the aim of seeing who would choose the fastest-growing shares over a given period. Not surprisingly he suffered a bit of blow to his ego when his 9 year old daughter beat him, his wife and his older son hands down!
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