Many parents will struggle to know where to start the ‘money talk’ with their children, and there is no doubt that the older they are, the harder it becomes. Having those conversations with children and young adults can become part of those regular talks about life, the universe and everything (including money)! It can help both sides to set realistic expectations and boundaries, and to develop a healthy relationship managing their money in the future.
Setting financial boundaries
If you are currently supporting (or thinking about supporting) your children, you will need to establish the boundaries for how this happens. Setting a realistic framework will ensure that, for example, they know how much they are going to get and for how long. Sit down together and agree on a plan that works for both sides. It is also important for you to stick to the plan and that you are not constantly bailing them out if they run out of money halfway through the month. These topics will need to be dealt with sensitively and with understanding. Tell them that you love and support them, but they do need to be able to manage their own finances independently of you and this is why these talks are so important.
’Young adults who discuss money with their parents are more likely to have a budget, an emergency fund and a retirement plan’ T Rowe Price March 2018
Talk to your children about what is really important in life and why. For some people it maybe the creation of vast wealth and material possessions that drives them. However, equally important to discuss with them the value of good health and healthy living and that they have opportunities to enjoy a good work life-balance too. Talk about their aspirations and how much that might cost eg what does it costs to buy a car, travel the world or buy their own home. Ask them what they see as the most important things in their lives and then help them to create a plan to achieve their goals with the available resources.
Living within their means and budgeting
Spending less than they earn – can be a difficult concept for many young adults (and many older people too!) so another important aspect of your conversation is to show them how to calculate how much they need to live on against how much they will receive. Create a budget template that includes all the living expenses – rent, heating lighting, car costs etc. alongside money for other items such as clothes and going out. This might be a real eye-opener for many young people as the true cost of living independently of their parents reveals itself to them.
Teaching younger children how to budget can be as simple as giving them a weekly allowance and talking to them about how they spend it, and if it would be better to save a little e each week to go towards those special treats.
The dangers of credit cards and loans
There is no doubt that acquiring a credit card or loan has become so much easier these days so talking about the benefits and risks (alongside the costs) is an important part of your money talk. Share your own experiences when you might have made a poor decision, or a wise one, and how that ultimately affected you might put it into context for them. Explaining in real terms, for example, how much of the monthly repayments is taken off in interest when paying back their cards or loans will give them a real example of the cost of credit
Saving for retirement
This is a tough one, as many young people don't see it as an imperative because it feels so far away from where they are now. Talk through with them about how much they might need to retire and the benefit of starting early so they can really see the benefits. Using real time examples of compound growth such as the fact that investing £1 for 40 years will be a lot more than the same amount invested for only ten. As an example, £100 at 5% growth for 40 years would grow to £704. The same amount invested for 10 years would only be worth £165. Added to this the fact the current state pension pot is more than likely to have completely disappeared for today’s 18-30 year-olds, it makes sense to discuss this with your children now. Take a look at this video for advice on how much your children should be paying into a pension and what the goals they might set for themselves.
Your financial plans
As your children get older they will need to know about what your plans are for the future and it is better to talk these things through whilst you are happy, healthy and able. What type of insurances and plans for longer term care do you have? How will your estate be divided up? Where do you keep a comprehensive record of bank accounts, insurance, will and professional adviser contacts – especially if one of them is going to be your executor.
We hope that this information will help you to start (or continue) the money talk with your children. It makes so much sense and will hopefully give them a sense, and a real feel, of what the benefits can be to managing their financial lives more effectively.
Please do get in touch with us at Warwick Financial Solutions if you need further help and support around this topic. Call us on 01926 400441 or e-mail firstname.lastname@example.org