Giving your children a head start with financial education and investing for your children's future
Financial literacy isn't an innate skill that we have when we are born. Learning how to manage money effectively means acquiring a few important life lessons that parents can pass on to their children from a relatively young age. With homeschooling on the agenda for many families at the moment, one perfect way to engage your children, a skill vital for everyday life, is financial education.
Early investment for your children means you can have enough time to build up cash for their education and their home deposits when they want to buy a home. Simply ignoring it could undoubtedly leave your children at a disadvantage when considering how expensive things have become now and may become in the future.
My first financial lesson and investment
Born in 1988, I had a thoughtful mum whose good intentions had a positive, long-lasting impact on my financial life. Mum opened my first bank account with NatWest, which came with the famous piggy bank. This porcelain money collector allowed me to develop the concept of saving money from as early as three years old. I remember using this piggy bank up to the age of 10 or later.
My mother was very intentional with me from an early age to teach me about the value of money. I remember her not getting me everything I wanted but giving me everything I needed. This simple lesson taught me that you do not always have to buy everything you want as you likely won't have enough money to cover the things that are needed. Financial discipline is the overall theme of what she was trying to teach me and is something I embody to till this today.
My mum invested in BT and Tesco shares, which she transferred to me around the age of 18. I can't say that I used the stocks for anything tangible, but perhaps if I adopted some of the lessons my mum taught me earlier in my life, I would have a lot more money invested at present. It was good to see that my mum had been thinking of me for a very long time beforehand and perhaps I should do the same for my children.
Money does not grow on trees
At the ages of 14/15, I remember working with my uncle during the school breaks where he paid me for work that I carried out for him. All the proceeds were saved in my closet as I was keen to buy myself an x-box. After long hours of working part-time, I was finally able to make that purchase after the countless hours mesmerising over the Argos catalog and popping into the Game store in Stratford, East London. As small as it may have been, I had a goal and the £5 here, £10 there added to my savings every week which culminated to me finally purchasing my coveted x-box. Could my mum have bought me an x-box, of course, but she didn't as she was teaching me a key lesson, which was to save up for what you want.
Encourage children to handle cash as soon as possible to help them recognise its value and to plan how to save some of their pocket money, so that they can save up to buy a new toy or book with their own money.
After all, good things come to those who wait, teaching delayed gratification is a great lesson. Children need to realise that you work to earn money and that it merely does not pop out of the wall at the cashpoint.
Lead by example
My wife and I are very disciplined when it comes to money hence why we still drive a 2005 golf and haven't been on holiday for a long time. We have a detailed excel spreadsheet on all of our income and outgoings and track our spend every week. We have also cleared a significant amount of our debt within a short period due to this same discipline. One day when my daughter grows up, she will look through photos and why we initially led a very vanilla lifestyle. Our response will be simple, "you have to do the boring things first before you do fun things". Meaning, financially set yourself up before living extravagantly.
Talk to your children about how much things cost and set a good example; your financial behavior will lead the way. It's essential for children to understand what budgeting means, to teach responsibility with money.
If you demonstrate responsible buying by creating a budget before you go shopping, comparing prices, using money-saving vouchers and curbing impulse purchases, you can lead by example.
Dividing money into different pots is a useful way to demonstrate only spending the money you have, as it helps your child to visualise where their money is going. When it's gone, it's gone.
Saving for the future
Before my daughter was born, I always thought about my mum's investments on my behalf and how I could invest for my children. As part of the Nigerian culture, when a child is born, family and friends will give money to the new parents and the child. My wife and I received on or around £2,000 from so many kind people which was amazing. We made an early decision to invest all of the money given to our daughter. Our thought process was that our salaries afforded us to be able to provide for our new child's needs sufficiently. Plus, on top of the money we received, friends and family had given us a years' worth of nappies, wipes and new baby clothes, we were privileged. We did not have any wants for our daughter.
I did some research in the junior ISA and found junior stocks and shares ISA with Hargreaves and Landsdown. I transferred the money into this account. I now had to decide on what to invest in on my baby daughter's behalf.
A friend of mine who is well versed in investment, mentioned four funds that I should invest in which I followed. Just before the pandemic, I decided to buy shares in Ocado for my daughter as I thought they were the future of grocery shopping. This Ocado stock has risen by 86% since I purchased it in March 2020. I occasionally joke with my wife saying that our daughter probably has the most cash between us all. My daughter was born in 2019, and two years on the investments have risen by 38%. Not bad for a one and a bit-year-old baby.
Junior Individual Savings Accounts (JISAs) are a good way for children to learn about the benefits of saving money for the future. Once the person who has parental responsibility for a child has opened the account, anyone can contribute to it, up to an annual limit (£9,000 this tax year). This means that the child can learn more about money management by saving some of their pocket money and watching it grow, before gaining control of it at age 16.
The money cannot be withdrawn until the child is 18, at which point, the account is automatically rolled over into an adult ISA, a valuable facility for those who want to continue saving or investing tax-efficiently.
Teach a life skill
Due to limited curriculum time, only four in 10 children and young adults currently receive financial education lessons. According to The Financial Capability Strategy, children's attitudes to money are well-developed by the age of seven. Research confirms that children who receive a formal financial education are more likely to be money confident and have a bank account, understand debt, be capable of saving and generally have the skills needed to make the most of their money in the future.
Simple things like playing family board games together that promote financial literacy; games such as 'Cashflow 101' and the ever-popular 'Monopoly', which now has junior versions, are a good starting point.
A lot of the above was based on our personal experiences but we wish we had professional advice which may have yielded in us achieving better results. Financialadvisers4u have been our go to people for mortgages and investment advice over the past few years and their contact details can be found below:
Michael Philpot Cert CII (MP) IMC, Financial Adviser, Direct Line: 0207 429 0322, http://www.financialadvisers4u.com.
If you have children and want to plan for their financial future, perhaps you can plan it better by speaking to Michael and his team.
The value of investments can go up as well as down, and you may not get back the full amount you invested. The information above is based on how my wife and I have invested previously and should not be considered as advice. Please consult a financial advisor who can help answer questions you may have.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.