Last updated: May 23, 2024

Six financial lessons for children

Noemie Williams DipPFS
Mortgage & Protection Adviser at Mortgages for Doctors

Six financial lessons for children

You want to give your children or grandchildren the best possible start in life. Teaching them about finances and how to manage money from an early age is one of the most important things you can do to set them up for success in the future.

But where do you start? We've put together a list of six financial money lessons for children that every parent or grandparent can teach their kids. (They’re useful no matter how old you are.)

By sharing these lessons you can help them develop good financial habits that will benefit them for the rest of their lives.

So let's dive in!

1. Encourage smart spending habits

We all know how easy it is to fall into the trap of instant gratification, which can often lead to overspending and impulse buying. Encouraging children to make thoughtful financial decisions based on wants versus needs can help prevent this.

One way to encourage smart spending habits is to teach children to differentiate between short-term and long-term goals. Short-term goals, such as buying a computer game now, should be balanced against long-term goals, such as saving for a car or a deposit on a house. Helping children understand the consequences of overspending through these types of comparisons is an excellent way to foster financial responsibility.

Another vital habit to develop is the ability to live within one's means. Ensuring that your child understands how to use a budget to allocate money for necessities, such as food and shelter, can teach them the importance of prioritising needs over wants.

2. Starting early pays off

Encouraging your child to save at least half of their pocket money or earnings is a good place to start. They can begin with small amounts that gradually increase over time. Show them the power of compound interest, and how even small amounts saved regularly can grow significantly over time.

Make saving fun by creating savings goals that your child can relate to, such as a day out with friends. Teach them how to track their savings and celebrate milestones along the way. When your child sees the results of their savings, they'll be inspired to continue saving for larger goals.

3. What is debt and how to use it

Debt often has a negative connotation, but it's not inherently bad. It's important for children to understand the different types of debt and how to use them responsibly.

For example, borrowing money to purchase a home or invest in higher education can be considered a good debt if it's managed well. However, credit card debt or high-interest loans can quickly spiral out of control and harm your financial wellbeing.

Teaching children about good debt and bad debt can help them make informed financial decisions in the future.

It's also important to teach children about credit scores and how they can impact future borrowing opportunities. By instilling these lessons early on, children can avoid the pitfalls of bad debt and make responsible financial decisions as they grow older.

4. How to manage money online

Managing money online is an essential skill for everyone in today's digital age. Online banking, budgeting apps, and digital wallets are just a few of the tools available to help kids manage their finances responsibly. It's crucial to educate children about the risks and benefits of managing money online and how to keep their information safe.

Start by setting up a secure online account for your child and show them how to navigate the interface. Encourage them to monitor their account regularly and keep track of their spending.

Using budgeting apps can also be helpful in teaching children how to manage money online. These apps allow kids to set financial goals and track their spending while giving them a better understanding of their financial habits and patterns.

5. The power of compounding

The power of compounding is a financial concept that every child should know about. It's the idea that even small amounts saved over a long period can grow significantly over time. It's like planting a seed and watching it grow into a tree. The key is to start early and make regular contributions.

The power of compounding means that the interest earned on the initial deposit is added to the account, and in turn, earns interest of its own. This cycle continues, allowing the account balance to grow exponentially.

6. The idea of earning to spend

Finally, it’s of course essential to explain to your child that while spending is necessary, it should be done responsibly and within their means.

Encouraging children to earn their own money and manage it responsibly is a great way to teach them the value of earning to spend. Rather than just giving them money, provide opportunities for them to earn it through chores or tasks. This not only instills a strong work ethic but also helps to develop the essential financial literacy skills they need to manage their finances effectively.

Encouraging healthy financial habits is an investment into your child's future financial success, and it's never too early to start.

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