Children are prolific consumers. Teaching them the value of money and the wisdom of saving and investing is a difficult undertaking. It is nevertheless entirely worthwhile and you can begin at a very early age.
There are a number of financial instruments available, some complex and difficult to understand, others more straight forward and simple to use. Nevertheless, introducing children to the range of products available should be gradual and aligned to their age and understanding. As children become young adults, their understanding of personal finance becomes more important. In the UK, the Government is taking a strategic view and considering including personal finance within the core curriculum in schools.
==Young Children==
Initially, when children are quite young, it is probably best to begin by explaining the concept of saving as an activity. You may even introduce simple savings mechanisms. A piggy bank is a good fun way to start. Some reward saving by providing a sweet when money is deposited for example. This starts to instill in children that saving has its rewards and reinforces the concept of saving as a worthwhile activity.
Parents have a part to play in encouraging saving in their children. It is not uncommon for parents to buy for their child what he/she wants when the child expresses their desire. Instead, parents could encourage the child to put money aside for the item and let them enjoy the satisfaction of having saved to achieve their goal. This also teaches children that they have to make choices about buying goods and that not everything is available to them just because they want it.
==Mid childhood==
Once they get a little older, you might want to introduce children to the banking system and savings products. There are a number of savings products designed particularly for children. They could open one of a number of these which are both interest bearing and designed to take account of their tax status. To encourage them to save using this account it would be good to have targets. If your child has a specific goal, the latest fashionable sneakers for example, help them to link the savings to that goal so that the benefits become apparent to them.
The child should begin to understand that using financial products adds to their savings and can help them reach their goal more quickly. They may not yet recognize the terms, but the concept of unearned income derived from savings will begin to become real to them and help to encourage the activity in the future.
==Late childhood==
As they get older still, the idea of interest and bonuses can be better explained. Emphasize how investing in certain accounts helps to ensure that their savings grow more quickly than putting money in a safe place at home. It would be best to start off with interest bearing accounts with little or no risk to the capital.
Once the child is ready, probably as a young adult, the notion of risk can be explained. That high risk investments often offer the greatest possibility for high returns should be underscored by the fact that you may lose some or all of your capital invested. Helping the young adult discover their how much risk they are prepared to accept will help guide them to appropriate investments.
Introducing the child to the range of investment products available may be difficult, especially if you do not understand them yourself. Also, they change quite regularly and the number of factors to consider when investing can be large and difficult to evaluate. It is probably best to introduce the underlying principles at this point. To identify the way investments operate and how tax plays a role in deciding which investment is the best for an individual’s needs.
It is at this point that the idea of corporate and government borrowing can be introduced and how the returns on any investment are linked to economic variables and company performance. You can explain the difference between interest and dividends and why that difference is important. Also, this would be a good time to introduce the difference between fixed term and open access investments and the impact of choosing one over the other.
==Adulthood==
As your child becomes an adult and takes control of their finances, the good work you have done in making them financial aware will pay dividends. They will be much more able to manage their finances and achieve their financial goals than they would have been otherwise. That is not to say that they will not still ask for your financial help, but they will be more independent and able to take control of their lives.