Mr Micawber’s Lesson

Financial Education at Home
By Rob Wight

If teaching your children about money has been on your “to do” list for some time, don’t delay any more – now is the time to act, no matter how old they are

Given we spend so much time with our children, I believe home educators often have the best opportunity to lead the discussion about money – the awareness of it, saving it, budgeting and eventually, investing.

In this article I will be discussing how we can better engage with our children to make them more aware of money and its place in our lives, together with the general concepts of budgeting and saving, including some practical ideas that readers will hopefully find helpful.

Awareness

Some people find money a difficult topic to talk about, however home educators (especially) need to get over that – if we don’t engage directly with our children on the issue, how else are they to learn about it? If you find yourself reluctant to talk about money, perhaps you should first examine the reasons why that may be the case, then address those to clear the way for open conversation.

The following hints and tips may assist parents in starting a family dialogue on the issue of money. Talk about how and where you first learned about money.

Was it a good or bad experience? In hindsight, what could have been done better? What other information would have helped you at the time? Be open and honest when reflecting on why that was the case and then use that understanding in discussions with your children.

Talk openly about the concept of paying bills – explain them and talk about how much they are, what they are for, etc. This is even more important in the “electronic age” where many bills and expenses are paid by card or direct debit. In the past, parents might have set aside money to meet bills and other regular expenses from each pay, either in a separate bank account, a jar or even a tin for each bill (I know mine did). This meant children often had an almost innate sense of budgeting, eg. if the tin was empty, you didn’t ask to buy your lunch!

While cards can certainly be convenient, it could also be argued that society’s use of “plastic” can give children a distorted view of money – extending even to the supermarket where you are offered cash with your groceries!

Budgeting

Discuss the family budget with your children. If you don’t have a budget, why not develop one now as part of an overall education process? Numerous financial studies have shown that people who don’t budget usually underestimate the cost of their “day to day” living expenses by a considerable margin, so take the opportunity now to sit down with your children and openly discuss what it costs to run the home.

To start, simply list and then total all sources and amounts of annual family income (eg. wages (after tax), family and/or other regular government payments, etc.) at the top of a clean sheet of paper or Excel spreadsheet. If you want a monthly budget, simply divide the total by 12 or, for a fortnightly budget, divide by 26 and so on. The end figure represents your available income.

Under that list and then total all regular payments made for things such as: loan repayments; groceries; petrol; health; telephone; electricity; gas; various insurances; car registration; water rates; council rates and the like. You will probably need to refer to previous bills to get an idea and don’t forget to allow for the fact some bills are paid annually, quarterly, bi-monthly or monthly.

When you have them all, total the payments and divide by 12 or 26, etc. (consistent with how you divided your income). Then subtract the payments total from the income total and what you have left is your monthly, fortnightly, etc. surplus. This represents the amount you have available after meeting all your necessary living expenses, to spend on discretionary items such as camps, holidays, DVDs, other entertainment, books, etc. or perhaps to save for other longer term needs. While I strongly recommend you go through the above exercise, alternatively you can download the budget form below.

By completing the process and openly discussing the budget along the way, your children will gain a clear sense and understanding of what things cost, and how much is left over after making allowance for the basic necessities of living.

Spending less than you earn is one of the basic tenets of financial independence, perhaps best summed up by Dickens’ endearing character, Mr Micawber, when he advised, “Annual income twenty pounds, annual expenditure nineteen pounds, nineteen shillings and sixpence, result – happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and sixpence, result – misery”.

Savings

Whether you give your children pocket money or they have a part time job, encourage them to save a certain portion of what they receive.

After completing your budget and, if your own finances permit, you might even like to offer an incentive, such as matching every dollar they save with one of your own (perhaps limited to a maximum amount each month). Another method is to increase pocket money with an understanding that a certain amount or percentage is to be saved each month.

Openly discuss bank accounts with your children and encourage them to open one each. It is never too early to do this. My children have each had their own bank account since they were babies. Most banks offer internet savings accounts at higher interest rates than a standard savings or passbook account, and as they also don’t usually charge any account keeping fees for children, these would seem to be the best option for accumulating a child’s regular savings. Just as we might have done with our old school passbook accounts, your children will be able to track their savings progress online whenever they wish.

Discuss the concept of interest rates. The internet accounts mentioned above also sometimes reward regular savers with interest rate incentives. For example they might pay a higher interest rate where there are regular monthly deposits to the account, or perhaps if there are no withdrawals in a particular month. When the children’s bank statements arrive, discuss what it all means and keep talking as long as they are interested. A conversation beginning with, “Why has Beth got more interest than I have?” might then go on to cover interest, percentages, regular depositing, compound interest, and savings habits. The next thing you know you could be talking about inflation in Germany before WWII!

Link the concept of saving money to achieving specific goals. For older children, you might encourage them to link their savings to say, buying their own mobile phone, or saving for a longer term purpose – a computer or a car. For younger children, it might be a toy or a book they really want. Often, once a few short term goals have been met, your child will realise the power of saving – especially if they have a part time job and the ability to grow their savings more quickly.

If one of your children wishes to spend all their pocket money, let them experience that. When the bank statement arrives, their balance will have grown less than their siblings’ savings. Talk about that in a relaxed and honest manner. Learning this lesson over pocket money is far preferable to getting into money troubles as an adult. Either way, regular saving with a goal in mind is a great habit to get into and one that will stand your children in good stead throughout the rest of their lives.

Despite Mr Micawber’s good advice, he, like Dickens’ own father, had great difficulty living within his means and his family suffered as a result. I hope you find the above pointers helpful in getting your family off to a good start in financial education.  Ideally, they can learn Mr Micawber’s lesson without his disastrous experiences.

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