A recent report from the Public Accounts Committee has warned of a “perfect storm” that could result in millions of young people failing to save adequately for retirement.
The report blames historic Treasury reforms to public service pensions and rising costs of living. The combination could see your child finish their career with an underfunded public sector pension and financial commitments, such as rent, continuing well into their retirement.
A positive relationship with money and sound financial planning can help.
Children begin exploring their attitudes to financial matters from as early as age seven. It is for this reason that the Scout Association recently launched its Money Skills badge, aimed at teaching beavers and cubs between 5 and 10 years old the value of money.
It’s never too late to alter attitudes or change bad money habits and doing so could be crucial to your child’s long-term financial security.
Here are five financial lessons you can pass on to your grownup children.
1. The importance of an emergency fund
The Office for National Statistics (ONS) recently confirmed that the increase in UK redundancy rates during the pandemic was faster than during the 2008/09 global financial crisis.
Figures published in the Guardian, meanwhile, highlight the disproportionate effect this has had on the young. Those under 35 accounted for almost 80% of jobs lost in the 12 months to April 2021.
A rainy day fund is the simplest way for your child to give themselves financial security in the short term. The pandemic has highlighted the need for this protection, demonstrating how quickly the unexpected can strike.
At Expert Wealth, we would recommend putting aside between three to six months’ household income. It should also be held in an easy-access account as the fund must be easily accessible in an emergency.
A rainy day fund could give your child the breathing space they need after a sudden job loss and avoid the need to open the Bank of Mum and Dad.
2. Budgeting basics
Balancing income versus outgoings is a crucial part of any financial lesson. Sitting down with your child and helping them understand their monthly costs can make a huge difference to how they manage their money.
Once they know how much is coming in, the 50/30/20 rule should help them to allocate their earnings effectively. The “rule” states that 50% of income should be put towards needs such as rent, food, and energy bills. 30% can go on wants, leaving 20% to be put into savings.
Making this budgeting choice at the start of the month means that the money put aside for the future won’t be missed. It is also important to stress that any money left over at the end of the month could also go into savings.
If your child can get into the habit of paying their future self first from a young age, they will see several benefits. Not only will their savings and investments receive more contributions, but they will have the chance for greater investment growth and the advantage of compound interest.
3. Paying off high-interest debt first
If your child has been to university, they might have accrued student debt. They might have other debts, such as credit cards, too.
It is important that your child understands the difference between high- and low-interest debt and that they make the right choices when paying off loans.
The right choice might not be the same for everyone, but, generally, high-interest debt such as credit cards, car loans, or an overdraft should be paid off as quickly as possible. A debt such as a student loan will likely be a much lower priority.
Student loan interest rates are low. It also won’t show on your child’s credit report, is linked to income so payments stop if your child becomes unemployed, and the debt is written off after 30 years.
Effectively managing credit card debt, on the other hand, can make a huge difference to your child’s credit score and make getting onto the property ladder easier.
4. The importance of protection
Once your children gain employment, teach them about the importance of protection. Using income protection to cover against a loss of earnings can make a huge difference if an accident or illness prevents your child from being able to work.
Once they have a mortgage or rent to pay – and a family financially dependent on them – knowing that a percentage of their earnings will be met even if they are unable to work will give peace of mind and a sense of control.
Critical illness cover and life insurance can give confidence that loved ones will be looked after should the unexpected happen.
5. Speak to the experts
At Expert Wealth, we can help your children put a long-term financial plan in place that will help them to build their wealth, protect their family, and live their dream lifestyle in retirement.
We can also help you to plan your estate – whether you opt for giving while living or want to manage a future Inheritance Tax liability.
Get in touch
Planning for the future is vitally important for you and your children and the financial lessons you pass on could make all the difference to your child’s financial security in later life. We can help too so please get in touch if you’d like to discuss any aspect of your long-term financial or inheritance plans.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
