4 important financial lessons to teach your children or grandchildren before they go to university

With September in full swing, university towns and cities across the UK will no doubt be expecting (or dreading!) the influx of students that arrives this time of year.

If your child or grandchild is among this year’s cohort of freshers, you’ll obviously want them to be as prepared for this next chapter of their lives as possible.

While ensuring they have the textbooks they need for class, or cutlery, pots, and pans so they don’t have to “borrow” off their new flatmates, you may also want to teach them some key financial lessons.

This may well be the first time they have been financially responsible for themselves. So, this could be the opportunity to share your knowledge and give them some advice that will serve them well not just during their studies, but throughout their adult lives.

Read on to discover four important financial lessons to share with children heading off to university this September.

1. How to create and stick to a budget

Budgeting is a key part of effective financial planning. Being intimately acquainted with your income, expenses, and savings is crucial for making sensible decisions with your wealth.

Whether they have a student loan, are working a part-time job, or you’re supporting them with a regular stipend, your child or grandchild will need to carefully manage this money and meet all their new financial obligations. So, ensuring they are familiar with creating and managing a budget is vital.

A good strategy for doing this is suggesting that they use a budgeting app or even a spreadsheet, entering all their regular expenses. This could include essentials such as:

• Accommodation, including both rent and utility bills
• Any education costs not covered by tuition, such as books and materials
• Travel costs, both to and from university, as well as coming home during holidays
• Any other bills, such as for their phone, gym memberships, or streaming services.

Then, make sure they include non-essentials, including the costs of leisure activities, going out socially, and clothes or other discretionary shopping.

From here, you’ll be able to explain how they’ll need to manage that monthly income to cover these costs. In some months, their expenses might exceed their income, so they might have to prioritise at times, cutting back on those non-essential costs to ensure they meet their non-negotiable arrangements.

Not only will budgeting help them manage their money while at university, but managing costs like this is part and parcel of adult life. Learning to do this now will be valuable experience.

2. How student loans work

Your child or grandchild may have an understanding of how borrowing money works. But, while the core concept is the same, student loans function slightly differently.

According to figures from the House of Commons Library, around £20 billion is loaned to around 1.5 million students each year. If your child or grandchild is one of them, it’s well worth them understanding how it works.

Student finance in England is usually made up of two parts:

1. Tuition fee loan, paid directly to the institution
2. Maintenance loans, paid to your child. The amount they’re entitled to will typically depend on where they’re living. They may also be able to apply for more depending on your household income as their legal guardian.

Your child or grandchild will need to repay the entire amount they borrow. But, they will only start repaying from the April after they leave university, and once their income exceeds a certain threshold. For Plan 5 loans (that is, those starting from September 2023), this threshold is £25,000, set to increase in line with inflation from 2027.

It’s essential that they understand what they will have to repay and when. It can often be useful to liken student loans to a tax, as the repayments are deducted much like when you enter a new tax band.

Other aspects of their student loan they need to be acquainted with are:

• The term of the loan – Plan 5 loans are automatically written off after 40 years, or if the borrower passes away.
• Its absence from their credit record – Make sure your child knows that, while it may be factored in when calculating affordability, their student loan will not affect their credit score.
• The way interest works – Interest starts rolling up from the student’s first day of university, so the amount they owe will increase from the very first day of their course. It’s important for your child to understand this so they don’t receive an unwelcome surprise when they see their first loan statement and find that their debt is larger than they might have thought.

A thorough understanding of how their loan works will serve your child well in future.

3. How compound interest works and why it’s important

Speaking of fully understanding the interest applied to a student loan, understanding compound interest and how powerful or detrimental it can potentially be is a crucial financial lesson – after all, as Einstein said, it is the “eighth wonder of the world”.

Explain to your child or grandchild that compound interest is essentially growth on growth. You could use an interest calculator to show them simple examples of how this can be beneficial, and why it could incentivise them to set money aside in savings during their studies.

You could even encourage them to do this by offering to partially or fully match their contributions to a savings account or pension while they’re at university.

It’s equally important to explain that the same can be true for borrowing, particularly credit card debt. Note that while compound interest can be an effective way to grow wealth, your child could quickly see their debt snowball and become larger if they don’t make timely repayments.

4. How to spot financial scams

As a member of the younger, tech-savvy generation, they might well roll their eyes when you raise financial scams with them. Even so, it’s still worth raising the danger of scams, and explaining to them that they come in all different shapes and sizes.

For example, while they might be well-acquainted with phishing messages and obvious scams on social media, they might not think of other “opportunities” as fraudulent. Indeed, only this year the Financial Conduct Authority charged nine reality TV stars who had turned to “finfluencing” with running an unauthorised investment scheme and financial promotions.

Had they been a fan of those particular individuals, they might well have invested their wealth in what they were promoting, and subsequently lost out as a result.

So, remind them of some simple strategies to avoid scams:

• Never share your card details or financial information with someone you don’t know.
• Take a beat before making big financial decisions, and don’t allow someone to use time pressure to make you do something – if they’re legitimate, they’ll understand.
• Be careful with what you see online and always properly research any “opportunities”.

And of course, make sure they know the golden rule: if it sounds too good to be true, it probably is.

Read more: Some helpful lessons from Mark’s recent experience of credit card fraud

Get in touch

Want to find out more about how you could organise your wealth for the benefit of your children or grandchildren? Email us at info@harperlees.co.uk or call 01277 350560 to find out more and we’ll be very happy to help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.