POCKET MONEY OR PREPAID CARD?

YOUR CHILDREN’S FINANCES

There is a famous cartoon called Calvin and Hobbes. Its hero, Calvin, is a six-year-old boy. In one strip, his father announces, hands on hips: “Calvin, your mother and I have decided to give you an allowance.” Looking pleased at this act of parental care and maturity, he continues smugly: “It’s important that one learns the value of money.” Calvin, snaffling the proffered coin, turns away, hunches over monstrously and rubs his hands together. “MONEY!!! HA HA HA!! I’M RICH. I CAN BUY OFF ANYBODY. THE WORLD IS MINE!!” At which, his father turns and calls down the hall: “I blew it again, dear.”

Most parents can probably remember playing Calvin’s part in their youth — can recall that intoxicating moment when money, from being something for grown-ups only, a totem of their power and your own powerlessness, becomes something for you too to spend. In my case, the only question then was how fast I could get to the toy shop.

But now that we are playing the part of Calvin’s hard-pressed father, how do we arrange financial matters with our children so that we too don’t have to call out, “I blew it again, dear”?

It can feel harder than ever. Cash, in one form or another, has been around for thousands of years. Yet, just at the point when we are having to teach the nippers about money, easy-to-understand coins and notes are fast disappearing. The cashless society is upon us, and cryptocurrencies and tokens have arrived as stores of value. They can seem baffling, and, as stories of wild swings in price and dodgy dealing abound, even unsavoury. Yet, there are those who would bet their bottom dollar that bitcoin and the like will become the cash of the future.

So, how do we prepare our children financially for a world where it’s not even clear how the finances will work? And once you have done that, how do you go about building them a sum to give them a head start in life? Do you allow pocket money or pocket an allowance? “Numeracy will always be critical,” says Russell Winnard, from the UK’s Young Money, which provides resources and training to anyone teaching young people how to manage money. “And coins and notes can help there, from as young as four.” Typically, children at that age will attribute the greatest value to the biggest things — making 50c worth more than a euro; or 2c more than 5c. Once you have established recognition, you can proceed to games. “Give them a selection of small change and ask: ‘How do you make up 20c with the coins you have?”

That is primary-school-level stuff. Winnard suggests that it’s critical to begin then, because “as it stands, there’s no formal, obligatory part of the [UK’s] primary curriculum dedicated to financial education. It’s only mandatory in secondary. So a lot of people can arrive at age 11 with no financial education at all. By then, it’s too late. If it’s not happening at school, then make it happen at home.”

If you do, he says, children should be able to grasp the concepts involved in insurance, inflation, compound interest and mortgages by the time they reach their late teens. Such concepts are increasingly important because, with increasing lifespans and fewer, if any, final-salary pensions, the impact of time on savings and pensions is growing in importance. “If you understand compound interest,” says Winnard, “you will be more tempted to start saving into your pension earlier.”

But how to accompany growing theoretical awareness with a practical, cash-in-hand pocket money strategy at home?

First, accept early on that it might not be best to hand over cash, or call it pocket money. Sure, for young children, cash is still a useful method of communicating

Bitcoin and blockchain; cashless transactions and junior savings accounts: the world of money is more complex than ever before. Does a €5 note as pocket money cut it anymore? And how should you save if you want to make a nest egg?

value — but data from the Payments Council shows that while the number of cash transactions remains high, the amounts involved are getting smaller and smaller. As they graduate to saving and spending more, our children, like the rest of us, will go digital.

For some parents, the idea of handing over a card — with its associations of credit — to their adolescent children sounds worrying. But, in fact, cards can be used and controlled in ever more flexible ways, often through mobile-phone apps.

Parents can charge cards up with an allowance, then see precisely where that money is being spent, decide whether it can be used at ATMs or not, even what times of day children can spend with it. Meanwhile, children can receive SMS balance alerts on their screen, so they know when their resources are running low.

The point at which to introduce non-cash money depends on when you feel confident your children have fully grasped the concept of cashless. “With cashless, younger people are not understanding what’s happening in transactions,” says Winnard. “Cashback in supermarkets is a very odd concept for them — you get the shopping and cash, too. As things get more cashless, it’s important to explain to your children what’s going on.” Once they’ve got it, begin to introduce ideas not just of spending, but of saving, too. This is where the idea of an “allowance” rather than “pocket money” comes in.

The latter all too often feels like the harvest of the magic money tree, a fruit which can be consumed without responsibility, on the assumption that more will appear in due course.

Clint Wilson, the founder of ParentPay, used to give his daughter, Amber, five euro pocket money, “but it was almost as if she felt she had to spend it the day she got it”. Just like the young Harry de Quetteville running as fast as his legs would carry him to the toy shop, she found her pocket money “burning a hole in her pocket”.

Substituting pocket money with an “allowance” changed that, says Wilson. Instead of the money purely being a treat, it became a way for Amber to take over little bits of the household budget. Instead of buying his daughters cinema tickets, for example, Wilson transfers the money to their cards. Then they might see that different screenings at different times cost different amounts and, because the money is theirs, act accordingly. “They begin to think about budgeting,” he says. And once they think about budgeting, they can think about saving.

A particularly good way of encouraging this good habit, says Wilson, is to think of something they really want, then set a target for how much they have to save before you top up the rest. In this way, you help them take responsibility for saving towards big-ticket items — like games consoles — which otherwise might just be the stuff of the special parental money trees that burst into flower at Christmas and birthdays.

Turning data into cash

It’s an open, no-nonsense approach to money that could also help prevent a repeat of mistakes on view in the recent past. “It’s good to teach children that they’re not going to get something straight away,” says Anna Sofat, founder of the financial advisor Addidi Wealth. “That was a big failing in the generation from the mid-1990s to the mid-2000s, where credit was so readily available. We had this concept ‘if you want something, why not get it now?’ We have to teach children the biggest lesson of money — that there are only two ways of making money: you either earn it and grow it, or you set up a business.” There may be an important lesson here for parents of children growing up watching famous people making oodles of money apparently for doing nothing. The Instagram or YouTube celebrity, it might be worth pointing out to them, is actually running a business. And running it hard, because the competition in what is called the “appreciation economy” is relentless. For every Kylie Jenner, a 21-year-old branch on the Kardashian celeb-tree whose make-up brand values her at a cool $900m, there are countless, countless others selling nothing to their paltry 110 followers on Instagram (Jenner has 110 million!). “Those who make money online are very systematic,” says Sofat. “99.999pc of the time, what you get depends on the effort you put in. Money is definitely like that.”

So, parents, talk about money with your children. Don’t make it a mystery or a taboo. Help them learn. Because if you don’t, then they might not help you learn. And you are going to need their help, come the fintech revolution. It is a revolution that is already seeing increasing use of digital tokens — like loyalty card points or air miles — that can be accrued and spent on the high street.

Meanwhile, blockchain technology promises us currencies that will bypass central banks entirely. Indeed, the very notion of government-backed “fiat currencies” like sterling or US dollars is already being challenged. Are you ready for that? It might very well be your children who, pausing only briefly to sigh, patiently explain to you just what is happening.

“Frankly, parents don’t need to know how it works,” says Wilson of cryptocurrencies. “What parents should start to do is appreciate that in the future there will be other forms of value transfer — of money — of which cryptocurrencies will probably be one. Much as they might want to, parents can’t just bury their heads in the sand and say ‘I don’t like it’.”

Getting to grips with stores of value that are less tangible than cash is crucial for another reason, too: our children should be aware their personal data has real worth.

“There’s a longer-term value in your identity online,” says Dr Tatiana Cutts, from the LSE. “Individuals are not monetising reputation efficiently yet.” But companies are. Facebook is worth over $600 billion and has roughly two billion users, making each worth about $300 to the site. Annual revenue per user is about $20. If you’re signed up, think of that as your subscription fee.

“I would be much more comfortable paying for Facebook and receiving the value of my data,” says Cutts. She’s not alone. And that’s precisely why many like the concept of the blockchain “distributed ledger” technology behind bitcoin — it promises to distribute value, in a secure way, not through a central bank or central company like Facebook, to those generating that value in the first place. And on Facebook, that’s you and your data. Or your children and theirs.

Saving for their future

Of course, the ultimate value you need to communicate to your children is not financial at all. “Don’t think you have to provide everything for them,” says Sofat. “Give them skills before money. Less money and more time with them might be a far better investment. Time with children is never wrong.”

But if you want to put some money aside for your children to come into when they turn 18, there is, she says, a sensible way to do it. For a start, you don’t have to be too ambitious. “Five or six thousand pounds is already a massive head start,” she says. It could help with a car, or a deposit on a rental flat. She advises aiming for €10 to €15k if you plan to give it to your child at 18, and perhaps €25 to €30k if you want them to have it at 21. Split that into three, and put a third of it into a pension. Put the other two-thirds into a savings account.

“We’ve seen some really lovely sums being built up where people just stick away €50 a month,” says Sofat. And coming into a pension at 18, she adds, might even encourage your children to continue investing in it themselves.

If you do manage to stick something away for the progeny, remember to tell them about it. Nothing is more likely to see them blow it than springing €30k on them on their 21st birthday. Instead, from their teens, go over their annual statements with them, so they can see where their money is invested, and how it has gone up or down in value. Prepare them, be open, but don’t make it a burdensome thing, because the last lesson of money is that it is only a means to an end.

“Money is great, of course it is,” says Sofat. “But think what you need. Food, a home. Aim and plan for that. Because tomorrow isn’t a given. You must also enjoy what you have today.”