The current high inflation rate is causing a rapid rise in the cost of living, which is likely to have a direct impact on your finances. As such, many people are trying to find ways to effectively mitigate more expensive weekly shops, from analysing their outgoings to investing more of their savings.
But could your children be left behind? Most parents who give pocket money do so at a static rate, but this may make it increasingly difficult for children to save for the things they want to buy because of high inflation.
So, what are the benefits of pocket money, and could giving your child a stagnant rate of pocket money limit the benefits of giving it in the first place? Read on to find out.
Pocket money can help teach your child financial skills
By giving your child a certain amount of money each week, you can help teach them important financial skills that they will carry with them into their early adult life. Plus, it helps give your child a sense of independence, giving them the freedom (to a certain extent) to buy what they want.
Imagine you give your child £5 a week as pocket money. Immediately after you start, your child understands that they have a budget to work with and will not be getting more money between “payments”.
Every child approaches new situations differently but learning from these experiences could be vital in their development. For example, one child may immediately spend their £5 at the local shop, and then realise they have nothing left to work with until the following week.
Another child may choose to save it to buy something they really want and will combine their pocket money for the next few weeks to afford it. A different child may save half and buy something immediately with the other half.
No matter their process, they learn the importance of money and will adjust their spending plan as they learn how to use it more efficiently. This could also provide you with a good opportunity to broach the subject of money management with them and show them how you prioritise your income.
Pocket money may be best given in small amounts
Moneyfacts report that the weekly average for pocket money in 2021 was £6.14 a child. If you assume a month is four full weeks, that’s a monthly income of just under £25.
This is a lot of money to a younger child and is a good amount for them to start learning key financial skills. It isn’t so much that they will go and spend it irresponsibly and develop bad habits, but it is also enough to make regular saving for more expensive items seem possible.
Plus, some parents offer their children bonuses for special events and good behaviour. In fact, the average bonus given to a child for a good school report in 2021 was almost £15.
Giving a small bonus in return for your child completing important chores could motivate them to work in order to earn a higher income, something they will need to adapt to in adult life.
Inflation could be making pocket money less effective
It may seem a strange concern to raise at first, but the effects of inflation on your child’s money could make it more difficult for them to achieve the financial goals they set themselves.
That’s because while the cost of living is rising, children’s pocket money is remaining static.
According to Moneyfacts, the average weekly pocket money a child received in the UK stood at £6.14 in 2021 – actually 4p lower than in 2020. This could make it harder for them to afford the things they want in the future.
For example, according to Statista, the average price of video games rose from £24.06 in 2008 to £34.43 in 2020. Plus, with the recent release of current-generation consoles, a new “Triple A” game can now release between £50 and £60 each.
Combine this with an inflation rate of 6.2% according to the Office for National Statistics, and prices like these are likely to only get more expensive in the future.
A child in 2008 would have needed to save all their pocket money for four weeks in order to afford an average-priced game. A child in 2020 would have needed to save for six weeks to afford a similar game.
It isn’t just video games that are rising in price either. All kinds of children’s toys, from action figures to LEGO playsets are also getting more expensive, as are days out for teenagers, like cinema tickets or a trip to the bowling alley.
With inflation rising at the rate it is today, a static rate of pocket money will only make it harder for your children to purchase the things they want.
Consider raising the amount of pocket money you give to your child each year in line with inflation, helping them to still afford the things they want at the same rate. This could help them to budget more and incentivise them to save and spend at the same time.
Get in touch
If you’d like to find our more ways to teach your child about financial planning, or you’d like to book a financial planning meeting yourself, please email email@example.com or call 0115 933 8433.