Everybody wants to be a millionaire but very few of us start saving right from the cradle. In fact, sentiments like "that kid is so mean, he still has his communion money" encourage children to spend, not save. Although children should be shown the importance of generosity it is also wise to teach them money management skills.
Imagine finding out that a child who invested her communion money turned it into a five figure sum by the time she was 18. It is possible, but such feats take careful planning. Adults must be willing to provide fun lessons to growing children on everything from piggy banks to chequebooks and investment portfolios.
The content of such informal lessons naturally depends on the age and mindset of the child. Once your son, daughter, niece, nephew or grandchild is old enough to ask about money and an allowance, they are usually old enough to save.
Initially, try to explain savings and investments as you would gardening.
For example, simply demonstrate how it is possible to grow a (money) tree by planting the (savings) seed, caring for it (investment) and watching it grow (profits).
Planting savings: Although children's cash savings are small initially, they may compile a good sum by retaining a portion of their allowance and cash earned through special jobs, good grades and gifts from birthdays and other events.
Children working in a family business may also collect a small salary for their efforts. In fact, a child may earn up to £4,700 tax-free per annum provided the parent is registered as an employer and it is the individual's only source of income.
If a child works in the family business, it may be possible to set up a pension for them at an early age, says Ms Ann Williams, director of personal financial services at KPMG. This option is increasingly popular in the United States and has been found to produce paper-millionaires even before retirement age.
Since an allowance is most children's first exposure to a regular helping of pounds and pence, pay it as you would a salary.
Negotiate the "paycheck" in advance based on the child's age, skills and needs. Pay it at the same time every week or month and deduct a predetermined percentage for savings.
Once the savings portion has grown enough, help the child put it into a moderate risk investment - for example a unit-linked fund with regular statements and low fees.
Try not to supplement the child's income or grant advances on their allowances. Insist that anything they want to buy is met from the allowance.
As they mature, show them how you meet the family's needs with your salary each month by paying the bills and mortgage.
Allow small bonuses to be earned for special one-off tasks like clearing out the cabinets, weeding or painting.
Reassess the child's allowance every year at a regular time, either on their birthday or first thing in the new year.
Caring for investments: If savings are started as young as five years old, the investment has at least 13 years to grow. A recent story on CBS MarketWatch, a US financial website, illustrates the benefits of compounding an investment over time.
In 1938, two siblings were given $1,000 worth of stock by their grandparents. The brother never touched the investment and claims it is now worth $1.8 million (€2.02 million). His sister, who was a more aggressive investor, has stock worth $5 million today, claims the story.
Although investing in one share or a portfolio of shares seems an attractive option, it has tax implications for the parents says Mr Kieran Ryan, tax spokesman for Institute of Chartered Accountants in Ireland (ICAI).
"Where a parent gives a capital sum to a child, any income which arises from that is deemed to be the income of the parent until the child hits the majority age of 18," he says.
Some hope is offered by recent tax changes says Ms Williams.
"Next January, unit-linked funds will be taxed on a gross roll up basis so you only pay tax when the funds are withdrawn," she said. As long as funds stay put until a child turns 18, the parents are not liable to tax.
Once the child encashes the fund, a duty of 25 per cent must be paid on any profits. This system also applies to life insurance-related investments.
Growing profits: With a little luck, your children should have some money-sense by the time they become adults. Encourage them to put any profits from their investments to practical use.
Some children will choose to leave the investment alone, others may use it as a downpayment for a property or for educational fees.
Personal finance for children is still a relatively new concept so there are few books available. However, the nationwide Money Advice and Budgeting Service (MABS) offers a book for kids and an accompanying guide for teachers. The Young Person's Guide to Money may be obtained free by calling your local MABS office.
