Teach them young and get them into good financial habits early, and it’s more likely that your children will grow up to be financially savvy. Starting their savings young can also be a big bonus for them when they reach adulthood – the money can go towards things which they need which they may not otherwise have been able to afford, such as a new car, university fees or a deposit for their first house.

Getting children involved at a low level is an excellent thing to do – school-leavers currently are not taught financial planning and know little about interest rates and credit and so often will not make the most of their finances.

So what are the best ways to start your children off on the right financial footing?

Learn through play
For young children who may not be ready to learn about the realities of money and savings, there are many shopping games where they can learn about handling money and giving change. These can be either in the form of small shopping stores where they can exchange plastic money, or in the form of board games. Monopoly is an old favourite which teaches about money management, property management and negotiations and compromising.

There are also plenty of PC games to choose from. If you go to sites like Yahoo games, there are plenty of free download games to choose from.

Savings Accounts
These are a simple, easy way to teach children about the benefits of putting money away regularly. It also teaches them about how interest rates work. Christmas is a fantastic time to open a new savings account for them as any money received can then be paid into the savings account.

There are over 100 children’s savings accounts to choose from with rates varying by as much as 4%. Do not be swayed by the incentives that some offer – good rates are more important than a short term offer such as a game or a soft toy. Parents need to open the account on the behalf of their child and they will need to fill in an R95 form (from Revenue & customs) to ensure that the child’s account is not taxed.

Child Trust Funds
For all children who were born on or after 1 September 2002 and who reside in the UK, they are entitled to a £250 voucher to open a Child Trust Fund (CTF) account. If your family is of a low-income, you can receive an extra £250 voucher. The Government will then pay another sum into the account when the child reaches 7. The account can be topped up by £1,200 a year – Christmas is again a good time to promote this account amongst friends and family to ask for money contributions instead of gifts.

The money can only be withdrawn by the child when they reach the age of 18. Any interest accumulated in the account will not be taxed up until this point.

The CTF itself can be either cash or investment. Cash is common because investment CTFs are more risky and although they can provide better growth, they can also lose money.

Shares
Shares are when you buy a part of a company and you share in both it’s profits and it’s losses. Buying shares with your child is an excellent way to introduce them to business and companies.

Pick a company which your child has an interest in – maybe a toy company, or a sweets company. Buy a couple of shares and follow their performance over time. You may want to plot a simple graph showing the shares’ progress. You can explain why the share value goes up and down and what factors affect the share price.

Investments
For slightly older children who understand how savings accounts and CTFs work, you may want to consider introducing them to investments. You will need to explain why financial planning is important for the future – for example to build up a deposit for their first house, or to accrue funds for university.

Funds that focus on growing your money rather than providing an income and the best option for children. Several companies offer unit and investment trust fund with specailist children’s savings plans. These are usually the same as the full schemes however the minimum-level thresholds are lower.

Bear in mind that whether you ‘designate’ the account with the childs initials or you hold the investment in a bare trust, you will be treated the same when it comes to tax – it will be charged at the parent’s rate for money they donate. Any other money will be taxed once the contributions exceed the child’s personal allowance of £5035.

A trust is also a good thing for your own financial planning – although it isn’t too flexible, it is a useful tool when it comes to inheritance tax purposes.

Pensions
Another option is to set up a pension for your child. Pensions are actually one of the most tax-efficient ways of saving for a child and they offer fantastic incentives. If you invest up to £2808 a year, the tax relief tops it up to £3600 which is an immediate cash boost. However, any extra money you put in will not earn you more tax relief.

Pensions can start from as little as £1 per month and can be setup from birth. Anyone can make a contribution to the fund, again you can promote the fund at Christmas. The only downside of having a pension plan is that the money is locked away from the child for a very long time.

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