BLOG: International Day of Education – The ‘four pots’ technique for children
With England currently in its third lockdown and children at home many of us are juggling home schooling, working from home and running the home – as well as taking time for our own wellbeing.
So, do we really need another ‘job’ to do by teaching our children about money? In short, yes. This year’s International Day of Education is looking at learning heroes, innovations and financing for those in the ‘Covid-19 generation’.
Finance, in particular budgeting, is one of the most important skills a child needs to learn yet is one of the least studied subjects in school.
At the start of 2020 nearly 27 million UK adults had personal debt – not including mortgage – and after a year full of job losses and furloughs the start of 2021 can only paint a darker picture.
Here is my ‘four pots’ technique that will help you educate your child whatever their age.
What is the ‘four pots’ technique?
Using their pocket money, the four pots technique is a thought process designed to teach children:
- the value of money
- the difference between short and long-term savings
- how to keep in perspective that money should be earned
How much pocket money should you give?
There really is no right answer here. A good rule of thumb (and don’t faint at this) is to pay the amount based on the age of the child, per week. This may be 50p per week, £1 per week or even £2. Personally, I prefer £1 per week per year of age.
If you were to start at three years old, and progress until at least 13 (this could go to 18), this would suggest £3 per week at three, £4 per week at four and so on. This equates to £156 per year at three, and £728 per year at 13. If that is too much for your budget, adjust by units of one.
How do we ‘train’ the concept of the money being earned?
This obviously must change with the age of the child, but at young ages, helping to set the table, putting the shoes away neatly (and putting them where they should go), etc. works well.
At older ages, there could be a car to be cleaned weekly, or shoes to be polished, perhaps garden help? When put into context like this, the child and the parent(s) can begin to appreciate the value of the money.
Remember that not all chores should be paid. If you have a list of three chores for your 3-year old only pay pocket money for two. This ensures they are not only learning about finance but also about how to run a home, another valuable life lesson.
The four pots
Pot 1 – charity/good causes
Using my earlier example throughout, for a three-year-old, this equates to 30p a week, for a fourteen-year-old, to £1.40 a week. By putting this money to one side to give to a charity, or donate to a good cause or similar, children will learn the joy of giving, and the value of money to people that either do not have it or who need it in particular circumstances.
How much of income? 10%
Pot 2 – now
This is probably the one most people think of as pocket money and puts into context the ‘amount per week based on age’ theory. This money can be spent instantly, or saved for a week or two, or for holiday money, and, as long as it is legal, can be spent on anything.
Yes, anything – this could include sweets, magazines or cheap plastic toys that last two minutes. The child will appreciate this independence and will also learn, again, about values.
How much of income? 30%
Pot 3 – special purchases/things to save for/’saving for something special’
For a three-year-old, 90p, and for a fourteen-year-old £4.20 per week, which must be put aside to fund a much-cherished special purchase, or to buy that “better” pair of jeans or bicycle.
For younger ones this can be into a money box, once older into a building society or bank account.
However, we are living in a digital world and there are several companies which provide parent-controlled accounts using pre-paid cards that are designed specifically for children.
By saving towards a known spend date/amount, the child will again learn about value, but also patience and budgeting too. Depending on the object, saving towards the purchase at the time of a birthday, Christmas or holiday works well.
How much of income? 30%
Pot 4 – long-term savings/investments
Finally, the longer-term element of the pocket money. The idea here is to start talking about what might be needed in the future, such as a car, a house or a holiday. Then, to have it “invested” in something, which is also fun to watch.
At a young age, and until funds reach at least £100, I suggest a decent building society account. Perhaps then National Savings & Investments’ Premium Bonds, before stepping up to purchase £100 worth of Disney, Coca-Cola or Sony shares, which can then be followed, for better or worse (these are not recommendations, merely examples). The longer-term saving is important and, I stress again, this can still be fun.
How much of income? 30%
I know this works, I have used it with my own children and hope you find it useful too.
Simon Gibson is chief investment officer of Mattioli Woods