What should our children (and parents) be thinking about from a financial planning perspective?
While of course, financial planning is important for all ages of life, it is not necessarily the most exciting topic for your children to be thinking about. Swings, sweets and CBeebies are much higher on their agenda. So, it falls on parents and grandparents to try and spark the interest. ‘Start saving as soon as you can’ is a common phrase we have all been told at some point in our lives, but what else should we be thinking about, as our children start to grow older and move into the wide world of work?
In the early years, it is a case of starting to build some savings for them. As you know, as children grow older, there is a higher demand for cash! This could be helping to save with school fees, university costs, or alternatively down the line, helping them step onto the property ladder. Of course, there are also things such as first holidays with friends, driving lessons, and other expenses that parents worry about being able to afford.
One idea is to start a junior individual savings account (JISA) for them as soon as you can. A JISA allows children to save money free of income tax, and free of capital gains tax, and therefore is a great home for some of those early presents/gifts of cash, received from loved ones in the early years. By investing some of this wealth they can see this grow, and at the point of age 18, they will be fully entitled to access these funds to use as they please.
In addition, having a child is a big life event creating an additional layer of responsibility for the parents. Children are dependent on their parents, and therefore parents must make provisions to protect the children should anything happen to them (unable to work, illness or death). This should include reviewing life and critical illness cover, as well as income protection.
As children start to get a little older, and take an interest in spending some money(!), conversations become less focused on protection, and move towards building wealth. Key lessons that children should learn are as follows:
- What is money and what is the importance of it?
- How do I manage my own money?
- Be aware of financial scams and, importantly, debt.
In the early years as a teenager, the simplest form of cashflow management can be learned - teaching children the different ‘pots’ they can allocate some of their pocket money to. This could be spending some, having some put into savings, giving some to charity etc. These are foundations that we all use later in life when we have our own earnings, as we put some towards the bills, some into savings and then the leftover part can be spent on ourselves.
When children understand the importance of money, they inevitably want to know how they can either get more money or grow the value of their existing savings. At this point, I think it is particularly important to educate children around finance solutions and debt. While credit cards and short-term loans can be very effective for many of us, the risk needs to be fully understood. Educating children to understand that once these options are available to them, this is not free money and must be repaid, with interest, is important. They also need to be aware of scams and understand that more often than not, if it sounds too good to be true, it likely is. The total unsecured debt per UK adult in January 2022 was £3,743 according to the Money Charity and therefore trying to ensure your children do not fall into this trap starts from a young age.
As they become young adults, complete various qualifications, and enter the world of work, a whole new manner of financial planning comes into the frame, and the questions around a mortgage/property purchase tend to become more frequent. Signposting them to an appropriate adviser here is the key takeaway. Also, some softer points of understanding, when children start working and get their first pay packet, they need to be able to understand their payslip – how tax and National Insurance contributions are deducted, what are their employee benefits and their costs etc.
There then comes a point when they should be enrolled into a pension scheme, and at the age of 22, a pension scheme is unlikely to be their priority. But being able to understand what this means for them, and how this works, is often required. A pension scheme is a very tax-efficient tool for saving for retirement, and auto-enrolment requirements mean that employees who are eligible will automatically be enrolled into a pension scheme. At this point, they will have to make a contribution themselves, or be entitled to an employer contribution as well, which is paid by the company. Contributions are made to ‘get the ball rolling’, and is often appropriate, but being able to manage their income to not hinder their other objectives is powerful and comes back to those early points around cashflow management. The cashflow management learned with their pocket money retains its importance, but the numbers become bigger.
Of course, there are plenty of things children need to think about, and the position gets more complex as they get older. However, the foundations built in the early years stand them in good stead to not slip into common pitfalls we so often see, such as “I wish I had started saving when I was younger”, or ‘I should never have taken out that loan’ etc.
While bespoke financial advice may not be needed for the children, having a family financial adviser, who not only looks after Mum and Dad but maybe Grandma and Grandad, is beneficial. They can then be available to speak to the children when needed, alongside Mum and Dad’s coaching. The cost of financial advice can be expensive, and not necessarily accessible to everyone. Therefore, by acting for the whole family it allows us to provide the support to all members and help younger ones with guidance as and when required. As wealth is passed through the generations the adviser is constant, providing the stability the family need with their financial planning.
This article is written by Wealth Management Consultant Jack Silk.