Personal finance for children - it's never too early.

A few decades from now (I):

"Can I borrow some money, dad?"
"I suppose so, but you'll have to start fending for yourself one day. You are 47 after all."

A few decades from now (II):

"Happy Father's Day, dad - here are the keys to your present."
"Aw, a Bugatti Veyron. You shouldn't have. I remember when these came out new, y'know. Did I ever tell you about the time..."

Rhetorical quiz time: Which situation would you rather be in? Which situation are you more likely to be in?

The reality as of the early 21st century is that in the UK (and probably elsewhere) the current young generation risks being in the unenviable position of growing up poorer than the previous generation. This is a bitter pill to swallow and could mean relying on parents for support for longer and a bleak retirement. You may already be, indeed I hope you are, saving and investing for your child but as noble as that is, there is something arguably more valuable you can do to benefit your child in their adulthood:

Education, education, education.

There's no point in working hard and squirreling money away if your little angel squanders it on their 18th birthday party, unless you teach them about how money grows and flows. At the risk of sounding like a grumpy old man, the low level of financial common sense among today's youth is nigh on scandalous and although it's not their fault, they are the ones who will suffer while watching their parents sail off in cruise ship retirement heaven. There is a charity, pfeg*, doing admirable work at improving the situation on a national level but parents are the ones who can make the biggest difference and here's how:

Avoid debt

Ironically the bigger financial mess you're in yourself, the easier it should be as your children witness your open efforts to fix it and become determined to learn from your mistakes. Visit the Dealing With Debt and Living Below Your Means discussion boards at the Motley Fool if this is you and you don't know where to start. If you're doing well for yourself, there's still hope. DadCafe does accept large donations but if that's too drastic, just ensure you don't spoil your child so much that they are unaware of the value of money and the effort that has to be put in to earn it. Some well-off friends of ours spend around £500 a month on the iTunes bill for their teenagers, all racked up on mum's credit card. Real life's going to be tough for those two boys. You need to be the first to introduce loans and credit cards to your children explaining both the risks and rewards. If the banks get to them first they will think it's free money and we all know where that road goes.

"Money is like manure; it's not worth a thing unless it's spread around encouraging young things to grow."
Thornton Wilder

Pay yourself first

After showing the little cherubs how it's done, it's time for them to get their hands dirty. When you give them pocket money, make it easily divisible (we give our toddler two identical coins) so that one half can go immediately into the piggy bank and the other is for spending. This is important. Treat that first half as a pre-adulthood bill. It must be paid before anything else. If nothing else, teach them the habit of saving so thoroughly that it becomes second nature, even if they do it just to shut you up.

Let your money make money

You probably already feel like the Bank of Dad sometimes so why not go the whole hog and pay them interest as well. At the end of every month, give them 1% of the total amount in their piggy bank. Not only will it improve their maths and encourage them to keep saving but they should also discover the power of compound interest and realise that when it works for you it's wonderful, when it works against you it's devastating.

Keep on track by keeping track

Keep a record of both spending and saving either in a notebook, a spreadsheet or even personal finance software. It may be a bit early to splash out on Quicken but there are several free alternatives of which Grisbi is a good example. Children should hopefully be 'entertained' by the sight of the figures growing in size and maybe even a flashy chart or two.

Armed with this knowledge, your children should be well-prepared for the smack in the face that is life on their own, however this doesn't mean we want to create a generation of money-grabbing misers and selfish Scrooges. As a complement to saving for yourself, encourage giving to others. Not only are you benefitting the needy, you are also planing seeds of generosity. This then leads to the true meaning of being wealthy which is being happy with what you've got and not just the posession of money. If you can nurture this mindset from the start your child can easily look forward to a rich future in more ways than one.

* (Off topic) Isn't it oxymoronic that an educational charity incorrectly uses lower case letters on their website and even in their official name? Just had to get that off my chest.

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