How to teach your children about debt management

Everyone is keen to teach young people about debt but unfortunately it's more about how to get into debt. Banks will offer student bank accounts with credit cards and some also target people in their first jobs with credit cards and special bank accounts.

But of course the banks are amateurs when it comes to the real debt pushers – the Government. Any young person going to university now can count themselves lucky if they come out the other end with debts of around £12,000 to go with their degree. Experts as students start paying tuition fees the average debt will rise to more than £20,000. And despite the relatively easy terms – no repayments until you reach a certain income level and interest rates below commercial loans – it is still a huge debt to start life with.

Debt burden

Of course £20,000 is only the average – many on longer courses such as would-be doctors and dentists will be looking at up to £40,000. With the Government aiming for 50% of all school leavers going to university debt is soon a way of life for most young people. Further education debts are only the start of it. Anyone attempting to join the property owning democracy and buying a house will find themselves in yet more debt.

It's no surprise that average ages of first-time buyers are heading inexorably higher with 31 the current age and predictions that 40 could soon be the new 30 when it comes to housebuying. Banks and building societies are responding with innovative plans to make it easier to borrow which are helpful if you want to get that first step on the property ladder. But all the schemes – ranging from self-certification, lending higher multiples of salary, lending against anticipated pay rises and allowing 110% mortgages – add up to more debt.

And in addition to all the debt young people are also encouraged to start pensions and save for the future. It's no surprise people turn to easy credit. Not getting into debt in the first place is the best idea but it's not entirely practical unless you are a member of the Royal Family or a footballer's child.

Pocket money

Learning about debt is the best place to start and today's children have a head start. Research for Royal Bank of Scotland shows the current generation of teenagers is the richest there has ever been. British 16-year-olds earn a total of £713 million a year and receive in addition around £258 million in pocket money. It's not enough to motivate most workers but it adds up to a reasonable start in life if used wisely. Unfortunately, according to RBS, around 54% of teenagers don't keep track of what they are spending and 46% don't understand the difference between a debit and a credit card.

Some of us might be surprised so many do understand the difference and also so many keep track of their spending. And some of us might be in the same boat. RBS also points out that 90% of teachers are worried about the knowledge of money management among teenagers. Financial capability is on the national curriculum in schools but often is either not taught well or simply just not taught at all. The Personal Finance Education Group points out that finance education is often marginalised in schools and taught for just 20 minutes a week. Teachers are not specialists and sometimes don't feel comfortable with the subject. However the Financial Services Authority and the Department of Work and Pensions are keen for more financial education and major banks are supportive.

But for now it's mainly down to parents to teach their children about looking after money and having a balanced attitude to it. To some extent this is the blind leading the blind but if you take the time it will help them steer clear of the debt burden the rest of the country has run up. Being responsible with credit is the most important lesson and being willing to save for things they want is vital.

Piggy bank

Learning to save from as young as possible is important – children of three or four can be started with a piggy bank and all the major banks and building societies offer special childrens' accounts. When birthdays and Christmas come around encourage them to save money into their account and let them work out how much they have. Luckily banks and building societies don't actually let them take money out until they are around 11 so there's plenty of time to learn good habits.

As well as savings accounts there are friendly society tax-free bonds which you can save up to £25 a month into for them. Again they can watch the money grow and cannot take it out generally until they are 18 or even 21. And the Government is helping children learn about saving – well those born after September 1 2002 at least. They are entitled to a minimum £250 in the Child Trust Fund which they can collect when they are 18 and can see growing over the years as other money is paid in. Once they learn to save they can build up a rainy day fund to tide them over and avoid the temptation of sticking money on credit. Children can also learn from being given pocket money which you might want to make them work for. If, for instance, they do certain jobs around the house they get paid and in that way learn about the value of working for money.

Be a role model

You also have to be a role model to your child. If they see you always using a credit card they will think that is the way to pay for things. They need to learn credit has to be repaid and that you will pay interest on money you borrow. Children need to be taught to keep track of spending – to keep a note of everything they buy so they have a running total in their head of what money they have left. In that way they learn to manage their money without it being seen as a reward for being good but as something they earn and manage themselves.

Teach them to put money aside for short-term saving, long-term saving and spending by giving them an amount easily divisible by three. Give them containers in which they can divide the cash up and pay them in coins. From small beginnings they can learn and avoid the worst excesses of the current debt generation although they will end up in debt. Guaranteed.