6 practical financial lessons you should teach your children before they start work

Category: News & United Kingdom

The Guardian recently reported that prime minister, Rishi Sunak, would like all pupils to study mathematics up to the age of 18.

This idea has attracted criticism, with some people suggesting that as many children don’t like maths, why inflict two more years of study on them?

However, from a financial planning point of view, some extra practical maths lessons could give your children more long-term value than quadratic equations and matrices.

That’s because it’s much easier to appreciate maths if you can see how the theory is applied to real-life circumstances.

So, discover six things you might want your children or grandchildren to know before they leave full-time education and start work.

1. Managing their income and expenditure

A good first practical lesson for your children would be to teach them about simple budgeting.

Ensuring your expenditure doesn’t exceed your income each month is a valuable lesson to learn, and it can also save money in the long term.

The lesson also could warn against the negative effect of compounded interest on such borrowing, and how easy it can be for credit card debt to spiral out of control.

On the positive side, it’s also an opportunity to encourage your children to set aside a percentage of their income each month into savings.

2. The importance of savings and investing

Appreciating the other side of the compounding coin, a good second practical lesson should cover savings and investments.

No one is quite sure if Einstein actually described compounding interest as the “eighth wonder of the world”, but there’s no harm you dropping it into conversation to reinforce the point.

An early savings habit can pay dividends – literally so if the money is invested in stocks and shares over an extended period.

Saving up for things, rather than borrowing, is a great lesson for your children to learn as early as possible.

3. How to understand utility bills

The third practical lesson is rather topical, given the recent eye-watering rises in domestic gas and electricity prices.

You certainly won’t be alone if you’ve looked at one of your monthly utility bills and found it close to incomprehensible – apart from the final column that tells you the amount you need to pay.

So, a lesson in how bills are calculated, as well as the pros and cons of different types of tariff, is a valuable lesson for your children to learn.

4. The details on their payslip

It must surely come as a shock to some people when they start work that an annual salary of £24,000 doesn’t mean that £2,000 is paid into your bank account at the end of each month.

A simple, practical lesson about how to understand your payslip will help explain this. The lesson could also include:

  • The relationship between tax codes and your Personal Allowance
  • Different rates of taxation
  • What National Insurance is, and how it’s charged.

It’s also an ideal opportunity to start talking to them about employer and employee pension contributions, and how they can be deducted straight from their monthly salary.

5. How pensions work, and why you should start saving early

Explaining the concept of a pension fund they may not be able to touch for over 40 years could seem counterintuitive to a teenager, but it’s a valuable lesson to learn.

It’s an opportunity to stress the importance of joining an employer-sponsored scheme and exploiting the benefits of compounding by starting to contribute as early as possible.

You can also reference pension tax relief – maybe explain that the government will effectively give them free money, which is never to be sneezed at.

6. Foreign currency exchange rates

A rite of passage for many teenagers is having a holiday abroad with their friends.

As this will inevitably involve buying foreign currency, it’s an ideal opportunity for you to instil a valuable lesson about currency exchange rates, and getting the best rate possible for your pounds.

The difference in rates can vary enormously between banks, specialist exchange desks, and other outlets. The money your children could save on £500 of holiday spending money could equate to a couple of rounds of San Miguel in a Spanish beachside bar!

Get in touch

If you want some help and guidance on some of the financial lessons you’ve read about in this article, then please get in touch with us.

Please note

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC legislation, which is subject to change.