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Children’s ISA’s – What You Need To Know

November 20th, 2011 Posted in kids and money
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It’s commonly believed that in the UK Children are exempt from tax. This is in fact a money myth.  They are treated in exactly the same way as adults, which means each child can in the 2011-12 tax year earn up to £7,475 tax free from income, savings or investments. Grown-ups who enjoy managing money sometimes look into an online accounting degree.

Usually children under 18 don’t earn that much from part time jobs etc, apart from a few young entrepreneurs, hence the often held belief that kids can earn tax free.

Assuming your child won’t earn more than £7,475this financial year (watch out child prodigies!),you can ensure that any interest is paid without the tax being automatically deducted by filling out the Inland Revenue R85 form (available from most banks or online).

Alternatively you can open a children’s ISA which allows interest to be paid free of tax plus attract a  much higher interest rate of upto 6% in some cases. Children’s ISAs were launched in November as an encouragement for children (and adults on their behalf) to save money. Many new accounts offer incentives such as piggy banks or high street vouchers. We think they should give away sets of The Financial Fairy Tales books instead as this will have a win win effect of encouraging new accounts and teaching children about money, (marketing execs take note!)

In essence children, parents, grandparents or anyone else can make deposits of upto £3600 in a tax year. The money stays on deposit where it cannot be touched until the child is 18. This makes it a great way of saving for future university fees, a first car or a gap year in the Caribbean!

Here are a round up of some of the best articles we could find on the subject of Children’s ISA’s

http://www.moneysavingexpert.com/savings/child-savings-tax-free

http://www.bbc.co.uk/news/business-15522384

Once you have decided on opening an account, this is a great opportunity to discuss the benefits of saving and start a money conversation with your children. Keep them involved with the choosing, the paperwork and making the first deposit.

Who know’s their savings might need to help look after you when your pension runs out!

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How to make your kids into good financial managers

September 17th, 2011 Posted in kids and money
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How to make your kids into good financial managers

These days, kids are getting into debt early. We’ve all heard the stories about students racking up thousands of dollars worth of debt and this can start even earlier when kids are in their teens. With credit card companies offering sweet deals as soon as kids are old enough to sign, it’s no surprise that so many are ending up in debt. But it doesn’t have to be that way. As parents we can do our part to teach children financial responsibility from a very young age. Here are some tips.

Get them a piggy bank

If kids are old enough to get money, then they are old enough to start saving. Get your kids a piggy bank so that they can start saving up the spare change they get from you, the presents from grandma and any cash that comes their way. Encourage them to put most of the money in the piggy bank and leave it there. That gets them started with the habit of saving money. After a while though, the piggy bank will get full and that’s when you move to the next stage.

View a selection of our favourite Piggy Banks

Get them a bank account

Your child is never too young to have a bank account even if you have to take responsibility for it at the start. You can make it into a big event to empty the piggy bank every so often, count up the money and deposit it in a bank account. Your child will enjoy seeing the bank balance grow even if he or she has no idea what to do with it yet.

The saving habit

Kids always want stuff so encourage them to take some financial responsibility. When they get money they can allocate some of it towards buying a treasured purchase, as long as they save most of it. Some parents use the matched funding method, where if a child is able to save half the purchase price the parent will pay the rest. This works well for younger kids with less earning potential.

The earning habit

Encourage your kids to do odd jobs to earn pocket money or boost their savings for a planned purchase. Having to earn the money themselves will give them a greater appreciation of what it takes to get it and they are less likely to fritter it away. This is one rule that you may want to apply with care because you have to make the distinction between the jobs that are regular household responsibilities and those which have earning potential.

Take them shopping

There’s nothing to teach your kids the value of money then taking them shopping with you so they can see exactly how much the products you buy cost. This also helps them to compare the relative costs of different brands so when they are older and go out on their own they won’t get a nasty shock. It’s also worth letting them see you comparison shop for household utilities. Let them celebrate with you when you get a cheap broadband deal or save money on electricity.

Encourage financial caution

This is one area where you can lead by example. Let your kids see that where possible you spend no more than you earn. Where you do need to buy something on credit you don’t spend excessively and you do repay it as soon as possible to avoid racking up high interest charges. Letting your kids understand the thinking behind your own money management practices is the best way to help them avoid a future debt trap.

 Celebrate entrepreneurship

There’s more to managing money than simply avoiding debt. Sometimes you have to find innovative ways of making money. So when your kids want to set up a lemonade stand or start a vegetable delivery business, help them to plan and achieve it. However it turns out, they will learn a lot from the experience which will help them manage money well throughout their lives.

Build skills gradually

When children get used to having a savings account, let them move to a checking account once they are old enough. Also consider a debit card or prepaid debit card before allowing them to have a credit card. If you are going to give your kid a credit card then explain how credit works, how interest works and why they need to pay on time. Backed by the other lessons you have given them they will soon be adept at managing their own money.

 

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How to learn the savings habit – video

May 21st, 2010 Posted in financial literacy, financial literacy for kids, kids and money, teaching children about money, teaching kids about money
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Please enjoy this short video which highlights 5 easy and fun ways to encourage your child to start the savings habit.

We like the Moorjar  – spend, share, save system. Its an unique money box with three separate areas. Have a look here

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How to Create a Child’s Savings Habit

May 19th, 2010 Posted in financial education, financial literacy, financial literacy for kids, kids and money
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Most of our habits, both good and bad we learn in childhood. By encouraging your child to save money early in life you are preparing them for a lifetime of financial responsibility and prosperity.

Einstein once referred to compound interest as one of the wonders of the world. A great example of the power of compound interest comes from the selling of Manhattan for a handful of beads:

In the early 1600s, the American Indians sold an island, now called Manhattan in New York, for various beads and trinkets worth about $16. Since Manhattan real estate is now some of the most expensive in the world, it would seem at first glance that the American Indians made a terrible deal. Had the American Indians, however, sold their beads and trinkets, invested their $16 and received 8% compounded annual interest, not only would they have enough money to buy back all of Manhattan, they would still have several hundred million dollars left over. That is the power of compound interest over time.

Warren Buffett, one of the richest men in the world uses a snowball analogy to explain compound interest:

“Life is like a snowball. The important thing is finding wet snow and a really long hill”

The really long hill referring to the effect of time on the growth of money.

Here is a simple example. If your child saved £10 or $10 per week over their working lives of 40 years and received an interest rate of 5% they would accumulate £61,040. However if they started 10 years earlier, that would be £106,740. That’s a difference of over £45,000 from an extra investment of £5,200.

Given that time can play such an important part in the growth of money, the earlier a child starts his or her savings habit, the greater will be their return. Here are 5 top tips to encourage your child to start saving.

  1. Lead by Example – have a jar or money box where you deposit your spare change. Children learn more by what you do than what you say. By wanting to follow your example your job is half done.
  2. Add interest – when your child is old enough to understand the concept of interest you can act like a bank and top up their savings. Keep the numbers simple by adding 1 coin for every 5 or 10 they save. It’s a good opportunity to introduce some simple yet important money lessons.
  3. Open an account – go with your child to the bank and open a savings account. Then make an event of going and making a deposit. Your child will make positive associations with the act of paying in money.
  4. Save for a purpose – it’s much easier to create an interest in saving (excuse the pun), when there is a strongly desired outcome on the end of it. Encourage your child to save for a holiday, a particular toy or something they value.
  5. Consistency – For saving to become a habit it must be done regularly and often. Then gradually, like brushing your teeth it becomes automatic and habitual. If you give an allowance encourage your child to immediately put some money away. If they get extra for chores or birthdays encourage them to allocate a percentage to saving.

In all the above examples it should be emphasised that for the money saving habit to stick it must be enjoyable and rewarding. The word encourage is used rather than coerce or force. Just as compound interest will reap rewards over time, so too will the investment in time spent to encourage the savings habit in your child.

We recommend the Moonjar system for encouraging children to save. Please visit The Financial Fairy Tales for details

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The Benefits of Teaching Younger Kids About Money

April 14th, 2010 Posted in kids and money, teaching children about money, teaching kids about money
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The Benefits of Teaching Younger Kids About Money

The benefits of teaching your children about money can be both immediate and longer term. In the short term, you are encouraging them to develop good saving habits, which may last a lifetime. They will also learn how to make informed purchases, and perhaps even understand why they can’t immediately get everything they want. In the long term, you are helping them avoid accumulating debt. By showing them the value of saving for the future, you can help your children plan for their financial security.

It’s never too early to start teaching you kids about money. Allow your children to help you determine what they are curious about and how best to teach them. You can use their questions to help develop lessons and conversations about money.

Explain to children that money is earned and is relative to the value that people give. An ideal time to begin teaching your children about the basics of money is when they first begin to notice it. To a young child, money comes from Mum and Dad’s pockets or purse. Or the magic hole in the wall machine that spouts dollars after merely pushing a few buttons. It’s understandable therefore, for kids to assume that money is readily available whenever it’s needed.

When you are trying to explain why you can’t meet their every demand, it’s better to avoid an overused response such as, “Money doesn’t grow on trees” when a more constructive explanation may serve both of you better. Consider instead encouraging your child to look at the consequences of the purchase. If they have A they can’t have B, or how could they save or earn the money for themselves?

Even very young children can begin to understand the concept of earning money. Explain to your children that money is received in exchange for working or as a return on an investment, and that you can only spend what you earn. To help them understand what it’s like to get paid on a schedule, begin paying an allowance. Then help them set goals for how they spend and save their allowance. It’s important, however, to make sure that you stick to the payment schedule; otherwise the lesson may be lost.

You may like to consider the spend; share, save method, where everything your child earns or receives they divide into the three areas. In this way you are encouraging them to develop good money management habits and also the principles of charity and helping others. You may consider adding a little extra to their savings as a way of demonstrating interest.

When paying pocket money or an allowance it is important not to set up an entitlement mentality in your child. If they think that they have a right to receive money from you from an early age they may grow up with that mindset. By all means link the allowance to chores and jobs around the home but consider that some tasks which contribute to the household should be done automatically and not for paid reward. You may like to create a separate list of family or community activities which the entire household share, along with an agreed list of extras activities for which your child will receive reward.

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