It’s session number 26, and we’re going to be talking about teaching children about money. Here in the UK at least, personal finance is only just beginning to be a part of the curriculum. For generations there has been no education about how to handle debt, how to set and keep to a budget, how bank accounts, personal loans and credit cards work, all the basics of personal finance. If our kids are to lead financially healthy lives, we need to have the financial equivalent of the birds and the bees conversation with them, and most importantly, we must lead by example.

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This week’s reviews

Lovely comment from Guy Routledge this week:

“Who would have thought a podcast about personal finance could be so accessible and entertaining? Pete does a great job of breaking down complex topics into manageable bite-size chunks and provides excellent actionable advice. Thank you very much for all your hard work both here and with your video series.”

Cheers Guy, it is hard work but I love it, and emails and comments like yours make it totally worth it.

Guy is right there are tons of videos on the site here, over 290 of them on every finance subject imaginable, so click search on the right and search for what you want to know.

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Introduction – My Money Story

I’m sure you remember the lessons your parents taught, or didn’t teach you, about money as you were growing up. Many of those lessons would have been unspoken, but some of them may have been ‘formal’ where a parent sat down with you and explained how something worked. I wanted to give you some of my money history as context for today’s session, so I hope I don’t bore you with that.

I’m a youngest child, with a bit of a gap between my two older siblings and me – I’m told I was planned, but you never know…!

My big brother Jonny is 10 years older than me, and I remember him getting a job as a trainee mechanic, and one day, I was in the room while my Dad was teaching him about how to write cheques. I don’t remember anything about what he said as I wasn’t really interested, being about 6 years old at the time. I do remember that he banked with NatWest, and at the time the chequebooks had beautiful pictures of birds on them – funny the details you do remember.

I never had the equivalent conversation with my dad when I was sixteen. From the moment I started to earn any money, £3.90 a week delivering papers six afternoons a week, I started to spend it. The paper shop used to allow us to take subs against our wages. So if I wanted some sweets during the week, I could deduct the cost of those sweets from my wages. Several weeks I got no wages at all as I had spent it all in advance – a very basic form of payday lending! I never had the discipline to wait until I was paid to enjoy my rewards – I wanted the sweets now.

I never really improved. I started working for McDonald’s at age 16 on weekends, and loved it. I worked in one of the busiest stores in the country at Fosse Park in Leicester, but when I was paid the money would be drawn out and spent on I don’t know what, More sweets probably, and maybe the odd CD.

I remember once my parents and I were going into town and I needed some new trainers. Mum said something about me contributing towards them out of my McD’s wages and I had to admit that I didn’t have any money and yet couldn’t tell her what I had spent it on. I felt stupid and embarrassed, and yet had I known that I would have to contribute, I probably would have saved the money.

Not once did I ever have a constructive conversation about money with my parents. All the conversations I did have were about why I didn’t have any!

(Aside -Mum and Dad, if you’re listening to or reading this, I love you so much and don’t blame you for any of this. My own profligacy is my own failure, not yours – but I am determined to do better by my own children)

When I went to university I opened a student bank account with HSBC – the logical progression from my Griffin Saver (Remember those? Action File FTW!). I was given an overdraft on the spot as well as two credit cards, one Access (Mastercard) and one Visa, both with a limit of £250. Nobody sat me down and told me how to use them, or how not to use them. I was also offered a student loan, which I didn’t really need as those were the days when you still got government grants to go to university and way before tuition fees were even thought of. I also transferred to a McDonald’s in Cardiff and worked quite a few hours so I probably had all the money I needed. I took the student loan anyway and blew it on – again – I don’t know what. Curries I think.

In my second year, I took out the student loan again, plus a personal loan guaranteed by my flatmate who was earning good money working for Sony in Bridgend and I bought two Korg keyboards. You may not know about me that I am a passable keyboard player and singer, and my band of the time, the mighty 2^nd Nature, was all I cared about. This may have contributed to my failure of my second year, subsequent dropping out of university and going into full time management with McDonald’s

By that time I had met and fallen in love with Joanne and wanted to get married. I remember driving off to a country B&B where we would be spending the weekend in the company of my big brother and his wife. With just Jo and I in *her* car on the way, it emerged that I had no money to contribute to the weekend at all – shameful really.

For the first few years of our marriage Jo handled all the finances, and eventually I took over. It’s now far more of a team approach, which is healthy. I should give Jo far more credit than I do for teaching me about handling money too. She has taught me so much in so many ways, and I’d be lost without her.

So it’s deeply ironic that I’m now a chartered financial planner and help other people manager their finances! The lessons from this sorry tale are the three things I think we need to know about teach our kids about money.

Everything you need to KNOW

1 – Kids learn by observing, not being told

Now I’m no child-psychologist. I have two gorgeous daughters, but that doesn’t make me an expert in how kids learn. I never had any sit-down lessons about money from my parents, but neither did I ever observe how they were with their own money. My dad was a evangelical church minister and theological writer for my entire childhood, so he was paid by the church. We had a nice house in a decent part of Bradford and then in Leicester. We always had enough. My brother says he remembers us praying about financial matters on occasion, but I don’t remember that. But I never saw or heard Mum & Dad talk about or ‘do anything’ to do with their money.

So I had no frame of reference as to how to behave with my own money. I learned some bad lessons early on and it took me 20 years to overcome them. Kids need to see a decent example of financial management being modelled by the parents – more on this later.

2 – The money lessons learned in childhood stay with them throughout life

Like I said, it took me twenty years or so to break the bad habit of spending first and thinking about it later. Right now I have no debt except for my mortgage, but it hasn’t always been that way. Part of the ‘problem’ is that we have always been on one income since our first daughter was born 13.5 years ago. Except for a brief stint as a Teaching Assistant a couple of years ago, Jo has never worked and this was a conscious decision on our part. Her superb home-making enables me to do the hours that I do. But it does mean that as we had kids younger than many people do today (I was 24) we didn’t have much chance to save money before they came along.

So not having the income to save lots of money is one thing, but I still tend towards the lack of discipline I developed as a child. I will always tend that way, even though now as I have got older I have developed the self-discipline to do better. I have to unlearn those childhood lessons (which I taught myself). Spending time with financially successful people has done wonders for me, but I’ll always be battling my inner child who wants things now, and who like nice things, like Apple computers and Crew clothing.

That childhood programming is hard to break.

3 – We can’t abdicate any part of our children’s financial education to the educational system

One thing is for sure, our school system, at least in the UK, isn’t going to teach our kids enough to put them on a firm footing. The excellent work being done by the Personal Finance Education Group is a great start, and I wish them every success. Things are changing but there is a very long way to go.

A quote on the PFEG homepage says that the average age that kids start to purchase items online is ten years old – we gotta get to these children while they are young enough not to have leaned bad lessons. Online spending is making it too easy to spend money they can’t see. No physical cash changes hands, it’s all ones and zeros over the wires. Nothing wrong with that, cash is doomed to disappear eventually anyway, but there is something powerful about spending cash for driving home the fact that this money has now gone, converted to an item of goods or service.

Abdicating financial education to the school system is as insane as abdicating sex education. If we want our kids to grow up financially literate, we’re going to have to teach them, and that’s that. There is so much wrong with the education system in any case – a topic that could easily take up another session –  that it makes more sense to assume your child will learn nothing useful about money at school. If they do, it’s a bonus. In the meantime let’s get busy ourselves, and look at what we should be doing:

Everything you need to DO 

1 – Mind your language

Money is so often the source of negative conversations in families. Worse, it is arguably the largest source of arguments between partners and a huge contributor towards divorce. While I’ve argued above that kids learn more by observation than by listening, I’m sure that the tone of language set by the parents when talking about money is a factor too. My parents never talked about money, and so that became the thing – we didn’t talk about money. Not conducive to open conversations.

Nowadays, Mum & Dad are much more open with us kids about their finances. They have moved house recently and in the process we had some financial discussions where I was able to help them with my professional knowledge. But it still felt a bit weird, as WE DON'T TALK ABOUT MONEY! I just hope they don’t start talking to me about their sex lives because that’ll kill me right off!

Set the tone in your home for healthy attitudes towards money.

• Don’t talk about the lottery being the answer – it isn’t. It’s a tax on the poor, thats all.
• If money is tight, talk about what changes you’re going to make as a family. Make it a challenge that everyone can play their part in. If you stick to budget, have a reward night and watch a DVD and some popcorn
• Better still, talk about saving up for a holiday. Set up a church-roof type thermometer to track progress so that everyone can see how the family is doing. How much more will you enjoy that holiday if you do it that way, rather than borrowing on a credit card and whining about how much it cost. Paying interest on a holiday would take the shine off it or me.
• If you have some spare money, have a discussion about how you might like to spend it and save it. Teach your kids about the importance of enjoyment now, balanced with laying up treasure for the future. Doing so will ensure your kids don’t grow up with a sense of entitlement. They have to look out for their own future; no-one else will. That will give them perspective about spending now.

I’m sure you can think of many more ways to make money a positive subject in your home. I’d love to hear of any you have adopted – let me know in the comments.

2 – Include your kids in your own budget discussions

Whenever I asked my Dad a question about money like how much he earned or how much his car cost, the answer would always be the same: “that’s none of your business, son”. I guess he just didn’t want to talk about it to his youngest son. But if ever my kids ask those questions I go out of my way to answer them, and to give some context to the answers.

The best thing you can do to teach your kids is to include them in your own discussions and make money a family project. Obviously your toddler doesn’t need to be involved, but I’d say from the moment they show an interest, or by age ten, say, you should include them.

When I’m updating the YNAB software and my budget spreadsheet (right-click and hit Save to download), the kids will often mooch around and ask what I’m doing. I always take time to show them. This is the money in this month, this is how much the bills are. This is how much is left and the things we need to do with it this month. They lose interest pretty quick, but it isn’t taboo, which is healthy. Keep the lines of communication open – good advice for any sphere of life with growing children – but especially about money.

3 – Cover the basics well, and ignore the deep stuff, for now

Don’t bore your kids with the intricacies of how hedge funds work, contracts for difference, or the pros and cons of value versus growth investing. They don’t need to know that stuff. They do need to know what a bank account does and how interest works. They need to know that money is its own reward for work done, but is better when it is put to use.

Remember the only three valid uses for money:

• Spending
• Investing for the future
• Giving away

Teach your kids this, and examples of how they can do all three. Teach them the joy of spending money they have earned, the challenge and triumph of saving up for something big and then going and buying it, and the utter pleasure of giving money away to someone who needs it more than you. The basic mechanics of how money works is all kids need until they go away to university or get a job, then you can teach them about debt and the rest of it.

4 – Don’t give pocket money – make ‘em work.

Pocket money is a daft idea, unless you’re a grandparent. In no other sphere of life will people be given money for free, except maybe the benefits system. While any civilised society should have a system whereby the better off share their wealth with the needy, dependence on handouts isn’t the kind of money lesson you want to teach your kids.

So make your kids complete tasks in return for the money you give them. Don’t send them up chimneys or down mines, but they could wash the car for you or walk the dog. Money in return for tasks completed is a healthy lesson. I bet that someone will disagree with this, and if you do, please tell me why. I’m happy to stand corrected by someone more knowledgeable than I am.

Jo and I don’t give our kids pocket money. We buy them the things they need, and we buy them treats as any parent should, but if they want cash, they have to work for it.

5 – Teach them to track

I’m a serial dieter. A great tip to help to lose weight is to write down everything you eat. It’s a check on the little snacks you (I) have all the time. The few leftover chips off the kids’ plates after the meal. The sneaky McD’s chocolate milkshake when I’m going past. The fantastic apple strudel by Lavender’s deli over the road from my office. (I’m thinking of relocating the office to the middle of some farm somewhere so I can’t just pop over the road and indulge!)

In the same way, planning then tracking your spending is the only way to be financially successful, and always will be unless you get to the point where you’re a mega-millionaire and have more money than you could ever spend. Even then, the toys just get more expensive.

We’re about to go on holiday and my eldest daughter will be spending some of the money she earned earlier in the summer helping at her auntie’s B&B. She will have written down how much she has in cash, how much she is taking with her, and what she spends it on while she’s away.

While I was closing my eyes and praying every time I went to the cash machine as a student, I had a mate who at the end of his first year spent the £600 HE HAD LEFT on a full set of Sabian cymbals. He was the drummer in the mighty 2nd Nature – we were quite good. My abiding memory of how he achieved this incredible feat – he wrote down everything he spent – it works.

Summary

So then:  we learned that kids learn by observation, those lessons stay with them throughout life. We also know that the school system won’t do much for them, at least not for another generation or so.

But by setting the right tone about money in your home, and by including your kids in your family finance discussion, you can teach them the basics they need to know, the value of money changing hands in return for tasks completed or value delivered, and to track where their money goes.

I’m sure there’s more I could say, but we’re 26 minutes in and that’s enough. I’ve really enjoyed this one – I enjoy them all – but I’d love to hear what you think.

Did I miss anything? Do you have any questions or comments? If so, please leave them below in the comments section.

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I hope you enjoyed this session. Next time I’ll be answering the top ten most frequently asked financial questions. I’ll be asking my adviser buddies for their input on this, but if you have a burning question you want answered, go to meaningfulmoney.tv/feedback and leave a voicemail

Thanks for listening – I'll talk to you next time