Financial education - a class act for kids

Children who receive compulsory lessons in personal finance in the classroom tend to be better off when they are older than those who receive no training, according to a recent report commissioned by Norwich Union.

The report cites the findings of research conducted in the USA which showed that compulsory financial education in school can lead to people being richer by the equivalent of a a year's salary between the ages of 35 and 49. Applied to the UK, this would mean that a couple with two children could be better off by £32,000, a couple with no kids could have £22,000 more and a single person would have £13,000 more in the bank.

Although 17 million of us are fairly good at managing our finances - that includes making ends meet, keeping track of finances, planning ahead and keeping up to date with new products - around 10.5 million have problems. Also in many cases, inertia holds us back. For example, we know that we need to save for our retirement but almost 40% of us do nothing.

With the trend these days towards self-care rather than relying on the welfare state, managing your finances is an important life skill. Yet only around a third of school children currently receive any formal lessons in personal finance.

Looking to build a nest egg for your fledglings? Take a look at Moneyextra's guide to Child Trust Funds.

The Institute of Financial Services created a Certificate in Financial Studies (CeFS), which is taught at AS level and also offers schools a GCSE curriculum as well but take up has been limited and the qualifications are only pursued by those looking to a career in the financial sector.

However, the government wants the subject of financial capability added to GSCE maths in the school curriculum by 2008. In addition, the Financial Services Authority (FSA) recently launched a programme called the National Strategy for Financial Capability to help grown ups aged 18-40 learn more about personal finance. The FSA has found that people in this group, especially those aged 18-30, are particularly poor at personal finance compared to their elders.

The FSA programme involves supporting financial education in schools, universities, colleges and the workplace. This includes providing teachers in 4,000 secondary schools with support and resources to teach the basics of personal finance in schools and introducing information packs and seminars for young people and parents in the workforce.

According to the FSA, many of us are in dire need of a financial education. We tend to be dunces when it comes to saving for the future and many of us take financial risks without realising it because we don't choose the most suitable products. Around 70% of us have made no provision in the event of suffering a loss of income.

Choosing the right product in the first place is another area where many of us fail miserably. Around 80% of us do not shop around or visit a financial adviser before buying a product.

How to help your kids

• Get your child interested in savings by opening a children's savings account on their behalf. Kids can manage an account on their own from aged seven. Children's cash savings accounts can be held until the child is 16, 18 and sometimes 21, after which they have to switch to an adult account. Remember to get the interest paid gross of tax but if it is more than £100 a year it could be taxed as your income unless the capital was given to the kids by someone else.
• Always shop around to get the most from savings. Use an online comparison service to pick winning deals. For example, with Halifax's regular saver for children you get 10% interest for a year as along as you pay in between £10-100 a month. After a year, the funds are transferred to the Save4it kids account for the under 16s, which offers 4.8%. Furness Building Society offers 4.9% on its Young Saver's account, while Abbey's Flexible Saver for kids pays 4.25% and the over 10s get a cash card and can manage the account online.
• Try to encourage children to save regularly. Children on average now get £8.20 a week pocket money plus many now have a part-time job earning on average £25.39 a week. They won't miss the money and it can soon mount up.
• Encourage older children to read about personal finance in websites and newspapers.
• Good financial management is based on working to a budget. If you manage what you spend and put money away for a rainy day, your children will pick up your habits.
• Children born after 1 September 2002 are entitled to the Child Trust Fund (CTF) from the government - make sure you make good use of it. Eligible children receive a voucher of £250, which has to be invested in a CTF account. Cash is the safe option but an equity investment is likely to be a better performer over the longer term.
• Make use of tax-free savings such as Individual Savings Accounts (ISAs). You can use your own ISA allowance to save up for your children and kids over 16 can have their own cash Mini ISA. National Savings & Investments bonus bonds for children are also tax-free. You mayinvest up to £3,000 for each child in each bond issue. The child may have access to the cash when they are 16.
• Think long-term and not just for today. You can start saving for your child's retirement through the stakeholder pension. It's tax efficient and your child can take over payments from age 18.

21 June 2006 © Moneyextra.com

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Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.