10 ways to teach your daughter financial planning
According to Prowess, the online hub for women-friendly business support, self-made female entrepreneurs are the fastest-growing group of millionaires in the UK.
This demonstrates that women no longer need to rely on their husband financially, with more and more women of all ages taking control of their own money.
While hard work will always be key to financial success, Dame Helena Morrissey – former head of personal investing at Legal & General and one of the most successful female fund managers in London – told This is Money that to be successful you should also cultivate “good money habits”.
As a staunch advocate of women taking control of their finances, she explained that having a total understanding of finances is essential.
So how can you help your daughter(s) become financially confident and independent in the future, ensuring they will always be able to stand on their own two feet and not rely on a spouse?
Read on to discover 10 ways to teach your daughter(s) to be financially self-reliant.
1. Teach them the importance of saving patiently
Patience is a vital lesson, and one that means your daughter is more likely to achieve a long-term financial goal. It is key to teaching her to budget properly, save money and not spend everything all at once, creating a positive habit for the future.
It can also ensure she does not take a short-cut to her goal using credit cards – something that could result in expensive interest charges if she doesn’t clear the debt in full.
Encourage your daughter to see saving as the cornerstone of good financial planning. Saving for a goal avoids potentially high interest rates of credit cards or loans, so help her to set a goal of buying something that is expensive for her, but not impossible. Not only will she learn to save, but she will also learn the importance of perseverance, and the satisfaction that comes with achieving a goal.
2. Take time to budget
According to Dame Helena Morrissey, one of the most important aspects of looking after your money means being self-disciplined.
“My first piece of advice to anyone who wants to make more of their money is to set aside some time to understand their position to make sure they are not blindsided,” she said in a This is Money article.
By encouraging your daughter to regularly assess her income, outgoings, savings and debts, she will learn to budget effectively and have the confidence to deal with her own financial situation going forward.
3. Be open and talk about money
Money is often a taboo subject around the dining room table, which can result in your daughter learning about money and finances from the internet or friends. This could mean that she is learning from people who do not have her best interests at heart, or from those who already have a difficult relationship with money.
Being open, and encouraging your daughter to talk freely about money and her concerns around it, will ensure she is learning from the very people who put her welfare first. It can help her become confident and empowered when it comes to her finances.
4. Always have an emergency fund
By teaching your daughter to save money, you can also help her understand the importance of building an emergency fund. As the last 12 months have shown, life can throw unexpected curve balls at all of us from time to time, and not having a financial safety net could create major financial problems for your daughter.
Being financially independent means not relying on others if an unexpected event happens. We at Finance Lab always recommend clients have between three to six months’ total expenditure in savings, as well as insurance to protect against long-term illness, accidents, or loss of income.
5. Never put “all your eggs in one basket”
In the world of finance, diversification is key. This means not putting all your money in one place, be that a single high street bank or investment.
This means a financial “shock” is less likely to have an impact as your money is spread out over a variety of providers and investments. If your money is in one place that is hit hard by a financial shock, the results could be dire.
While you may start by encouraging your daughter to use more than one savings account, later in life she could diversify through investment and banking providers, types of investment and tax-efficient savings.
6. Money is earned
A key lesson is that money has to be earned. While it may sound obvious, giving large allowances or paying for your daughter’s lifestyle may teach her to depend on others for money and the things she wants to buy.
Encouraging her to work for her money will not only create a positive work ethic; it will also teach your daughter the value of money. I heard a story recently about a teenager who started work and stopped buying coffee and muffins at a café near her home, as she realised it cost nearly an hour’s earnings!
7. Understand compound interest
Dubbed the “eighth wonder of the world” by Albert Einstein, compound interest is where you earn interest on the interest you have already built up. Over time this has the potential to dramatically increase the earning potential of your investment or savings, as the following example demonstrates.
For ease of maths, you invest £20,000 into a product that pays 5% interest. In year one you will earn £1,000, boosting your savings to £21,000. In year two, you receive 5% of £21,000, which is £1,050, taking your savings to £22,050. This carries on, meaning in year five your initial investment has grown to £25,525 through compound interest alone.
8. Invest in a pension as young as possible!
While talking about retiring may seem a like a strange thing to do at your daughter’s age, many young people fail to grasp the importance of investing in a pension as young as possible.
Many of those we at Finance Lab speak to are surprised there is no minimum age for contributing to a pension, and some parents contribute to their child’s retirement when the child is still a toddler.
As your daughter starts work, though, it is an ideal time to look at potentially contributing towards a pension over and above their workplace pension. This can have several benefits:
- Your daughter can have more control over how and where a personal pension is invested, which may expose the money invested to greater potential growth.
- Subject to the relevant tax rules, she will get an uplift of 20% from the government, meaning for every £100 she contributes to a pension, it will cost her £80 if she is a basic-rate taxpayer.
- If she boosts her workplace pension, the employer will also be contributing, meaning your daughter gets an uplift from the government and the employer.
- The younger you start, the less you need to contribute to get the desired income in retirement due to compound interest, as explained above.
While pensions can be used to reduce tax through the likes of salary sacrifice, there are complex rules for taxation. Investing in pensions can also carry risk as well as returns, so always ensure your daughter speaks to a professional financial planner about pension options.
9. Use tax-efficient investments and savings
ISAs, Premium Bonds, and pensions can offer tax advantages, so teach your daughter what they are and how to use them. One way to do this may be to allow your daughter to sit in on meetings with your professional adviser, so that they can fully explain how tax-efficient investments work, as well as the risks and rewards associated with them.
10. Speak with a professional financial planner
Help your daughter understand the value of speaking to a professional financial planner, who can help her understand the opportunities and risks involved with money.
Having a professional that your daughter can speak to ensures she can discuss her concerns with a trusted planner and is less likely to make a financial decision she may later regret. As part of our service at Finance Lab we regularly educate our client’s children and grandchildren by discussing money, finance, and tax.
For us, this is at the heart of financial planning, as it involves future generations in your long-term strategy. At the same time this unbiased knowledge helps your children and grandchildren to make better informed decisions about their finances.
Get in touch
If you have any questions about how you can help your daughter achieve financial independence and stability, please call us on 0116 262 1414.
From building an emergency fund, to achieving your financial goals or protecting your loved ones, we at Finance Lab can provide you with peace of mind about you and your family’s future.
This article is for information only. Please do not act based on anything you might read in this article until you have sought professional advice.