There are three stages of pocket money management. The first is the gift that is given freely to the child. The second stage occurs when the thrifty child saves their pocket money. The third stage is the money they raise themselves.
Initially, for most households, pocket-money will begin as a weekly allowance given to the child in order to create a sense of familiarity with money. Gradually, the child becomes aware that this collection of gold and silver coins can be used for purchase. As a result, the child will spend most, if not all of the money from their piggy bank on sweets or other low return commodities, and then re-visit the Bank of Mom and Dad to ask for further credit. At this point, many parents will realise they do not wish to foster a trust-fund mentality where the child believes they will always get something for nothing.
The next stage in pocket-money management develops, when the parents seek to inform the child that money does not grow on trees. The child is duly informed that if they want something, it usually involves saving and this is where problems arise.
High on the list of difficult lessons to impart, is teaching your child the value of money. Rate it alongside other lessons such as teaching your child where babies come from or teaching your child about the benefits of a tidy bedroom. There is nothing more excruciating than explaining savings to a person for whom Santa Claus is still a central cornerstone of their belief structure. At this point, a glazed expression is to be expected but this does not signify that the child will never become financially astute.
A better solution is to make your child aware of opportunities to take advantage of certain tools that will allow their savings to grow at a faster rate. This is a simple exercise in investing in growth opportunities.
There is a snag. Try to explain interest rates to a seven year old and watch the lights go off all over Never-Never land. However, explain that every time Mommy or Daddy use a swear-word the child will charge them interest of 20p and you might just witness an illumination that will last a lifetime.
For a nominal outlay, your child can create a swear-box that will see their savings increase dramatically, in some households by as much as £1 per day (more so if Uncle Fred decides to visit). Having created a cardboard box with a slot, the child can sit back and watch their funds increase with minimal input.
Now extend that principle to a bucket and sponge and the child could set up a neighbourhood car-washing service that may see income increase by as much as £5.00 per day (in some lucrative sectors).
As the child grows and becomes more confident, there are other markets they may wish to explore such as the lawn management scheme which offers healthy seasonal returns or the baby-sitting schemes which could see their savings quadruple, literally overnight. By the time the child turns 16, they may be sitting on a healthy reserve.
It all comes down to choice and, like anyone else, the child must be made aware of opportunities from a very early age. Either they use their pocket money to purchase low return commodities, or they save it steadily in piggy banks, or they can make their money work for them in schemes which offer higher returns.
Do as I do, not as I say.
When parents decide the time is right to choose the appropriate savings account for their children, they can apply the same logic. Again, it comes down to choice. You can spend your money on low return commodities; watch it grow moderately in a bank account or you can make your money work for you in funds which offer higher rates of return. The value of investments can go down as well as up and you may get back less than you invested.
The launch of the Junior ISA last year has meant that saving for your children has never been easier during a time when planning for the future has never been more essential. Companies that provide Junior ISAs, like Fidelity UK, allow parents to save for their children while achieving higher rates of return. Paying for university fees or getting a place on the property ladder may not seem so daunting a prospect for the future. Every decision your child makes regarding their weekly allowance has an impact on their potential growth. The lessons learned from simple pocket money management can be applied to both parent and child.
The value of tax savings and eligibility to invest in a Junior ISA will depend on the child’s individual circumstances and all tax rules may change in the future.
Junior ISAs are only available to UK resident children under 18 who do not have a Child Trust Fund (CTF). Please note that if your child was born between 1 September 2002 and 2 January 2011 the Government would have automatically opened a CTF on your behalf so your child will not be eligible for a Junior ISA. The investment is locked away until the child reaches 18 years old.
Amy Fry is a former career finance adviser, now turned stay at home mum. She writes about mental health issues and provides valuable financial advice. She is a frugal lady and enjoys teaching the same values to her children. For more information on helping your children managing their personal finances from early age visit https://www.fidelity.co.uk/investor/isa/junior-isa/default.page or http://life.familyeducation.com/money-and-kids/personal-finance/34481.html.