Passing on good Financial Habits to your Children

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Posted on: 6th July 2018

Researchers have found that the way we are able to handle our finances is fully shaped by the time we reach the age of 7 and that young children’s behaviour can be shaped by playing board games and using money apps.

Paying the monthly bills, mortgage or rent payments and meeting the cost of monthly bills are all challenges we face in our daily lives. Worrying about meeting these challenges is a problem most of us encounter from our early twenties. Whilst some of us may struggle to pay the bills and will live for the moment: others will budget strictly and plan for their monthly outgoings. So what determines how we deal with and handle money when we reach our 20s? Why are some people natural spenders, whilst others are natural spendthrifts?

According to experts, the behaviour is determined by the age you learn to spend responsibly. In fact, a large study conducted jointly by the government’s Money Advice Service and behaviour experts at Cambridge University has found that adult financial habits are typically engrained by the age of 7.

By that age, the report argues most children have already grasped how to recognise the value of money and are capable of carrying out fairly complex functions, like how to plan ahead, how and when to delay gratification, and understanding that when certain choices are made, those choices are irreversible.

Encouraging Positive Financial Habits in Children

Although it is important to teach children about the value of money and making wise choices and smart financial decisions, for many young people, it’s a matter of too little, too late:

“The habits of mind which influence the ways children approach complex problems and decisions, including financial ones, are largely determined in the first few years of life,” says Dr David Whitebread, the co-author of the study. He believes that this core learned behaviour is likely to influence their financial decisions when they are adults.

The study also urges parents not to underestimate how their own good and bad financial habits can influence their children’s behaviour in later life:

“Since young children have few monetary resources they control independently, it is the basic approaches and skills which are modelled, discussed and demonstrated by parents that are likely to be influential levers, instilling efficient habits and practices,” it says.

Parents Lack Responsibility for their Children’s Financial Habits

Parents who choose to help their children to plan ahead, reflect on the past decisions and self-regulate can have a huge impact in promoting good financial behaviour in later years, Whitbread believes.

A survey by M&G Investments found that 83 per cent of parents recognise the importance of teaching their children about the value of money. However, recognising this value and having the confidence to put that behaviour into practice are not one and the same: the study found that 1 in 6 parents lack the confidence do this. Moreover, over a quarter of parents believe that children should take responsibility for understanding money themselves.

“I understand that, for parents, it isn’t particularly attractive to train a child about adult things like money and inhibition,” says Dr Sam Wass, lecturer in developmental psychology at the University of East London, who appears on Channel 4’s The Secret Life of 5-Year-Olds.

“There’s joy in the fact that young children are spontaneous and live life in the moment, unfettered by adult problems. But teaching children about money when they are young is a good way for parents to help them learn to delay gratification so that the child thinks: ‘I’d like to do this but I’m not going to’. Hard evidence suggests, if you want your child to do well in life, the earlier you can start trying to teach them inhibition and self-discipline, the better.”

How can parents help to teach their children to spend responsibly?

There are all sorts of ways a parent can help a child to appreciate the value of money and to spend responsibly.

One simple way is to give them pocket money and help them to analyse and learn from any foolish spending decisions. In 2017, Halifax’s annual pocket money survey revealed that, on average, parents tend to wait until the child is just above the age of seven before they hand out pocket money.

Another approach is by using board games which can help teach a child the importance of financial responsibility. In the past 15 years, Pop to the Shops, a game for 5 to 9-year-olds, has been one of Orchards Toy’s top 10 bestsellers. To win, players must use fake coins to purchase everyday grocery items from various shops on the board and give other players the correct change when they visit their shop. If they cannot afford the item they desire, they must opt for something cheaper. How does this help children? Well, “it acts as a conversation starter about money – parents can fill in the gaps,” says Orchard Toys’ product manager Rachael Sutcliffe.

Can Apps and Games make a Difference?

In February Orchard Toys spotted a gap in the market and released Money Match Café. Aimed at 5 to 8-year-olds, players must recognise and add up different denominations of coins to match their cards and serve food to “customers” – the children’s cuddly toys.

There are also a few tracking pocket-money-tracking, and payment apps available like RoosterMoney and goHenry. Aimed at children under seven, both aim to help children develop better money habits. However, the value of such apps is dependent on children receiving enough pocket money to an app to track their spending which Halifax’s research suggests is not always the case.

Surprisingly, given the research about habit-forming in young children, there are very few gaming apps aimed at helping under-sevens. However. Pigby’s Fair, developed by NatWest, is a notable exception. The aim of the game is for children to solve basic puzzles and earn virtual money by selling their creations at stalls in a fair: it is then up to them to spend or save it.

However, the need to shift virtual money around and take into account interest payments and pocket money bonuses makes this financial education tool quite complex. There are many other online games that focus on coin recognition and money counting, such as the BBC’s Igloo Shopping game or Top Marks’ Coins Game.

But what about children who find these sort of games uninteresting? What’s available for them? One exciting and free option is for parents to take their children on a visit to Metro Bank. Although the bank doesn’t allow children to open an account until they turn 11, it [does] offers young children a chance to learn about money inside its branches by inviting them to use the “magic money machines” to count their coins. It also offers rewards for children who exchange coins for notes and can accurately guess how much was in their piggy bank.

Conclusion

Many adults believe their parents had the biggest influence on their money behaviour. So, when is the best time to begin encouraging good financial habits? The answer is simple: as early as possible and definitely before the age of seven.

Talk to Haven IFA

Having your own financial investments and savings in [good] order is essential if you wish to pass on good financial knowledge and wisdom to your children. This will give your children a better understanding of financial planning and save when they start their lives as independent adults. Having an expert on hand to help you make the best decisions for your future is a wonderful way to build positive financial habits. Contact Haven IFA to see how we can help.