What can we teach our children during a cost-of-living crisis?

In today's world, where the cost of living feels like it is soaring and interest rates have been climbing, it's crucial that you, as a parent, use moments like these as an opportunity to prepare your children for the economic realities they may face. However, discussing financial matters with kids can often seem daunting. How do you explain complex issues in a way that's both understandable and engaging for them? In this article, I will try to help you navigate these conversations, ensuring your children are informed, prepared, and capable of making smart financial decisions in the future.

Understanding the Basics

Before diving into discussions with your kids, let's break down the essentials:

• Inflation: This occurs when the general price level of goods and services rises over time, reducing the purchasing power of money. In simpler terms, with inflation, you end up paying more for the same things than you did before, whether it's a loaf of bread or a cinema ticket.
• Cost of Living Crisis: Stemming from inflation, the cost of living crisis occurs when the prices of everyday essentials (like food, petrol, and rent, etc.) increase at a rate that outpaces the growth in your income. This mismatch makes it harder for your family to cover your basic needs, leading to tighter budgets and, in some cases, financial hardship.
• Rise in Interest Rates: Interest rates are what banks charge when you borrow money. When these rates go up, so do the costs of loans and mortgages. This can make saving money even more challenging.

Explaining Why It Happens

Kids are naturally curious, so they might wonder why these changes are happening. Try to use simple analogies to explain complex concepts. For example, you could compare the economy to a balloon that sometimes inflates (grows) and sometimes deflates (shrinks). The cost of living crisis can occur when the balloon inflates too quickly. When this happens, it is often your government's job to let some air out of the balloon before it pops. They usually do this by raising interest rates.

How It Affects Life

To explain how this affects our lives, let's relate the concepts directly to your children's world. Explain how a rise in the cost of living might mean cutting back on certain luxuries, like eating out less often or choosing more budget-friendly holidays. For older children, discuss how rising interest rates can affect things like whether now is the right time to buy a house or if you should decide to save the money and benefit from the higher rates of interest on your savings.

Learning from a Cost of Living Crisis

• Avoiding Short-Term Debt: Explain the pitfalls of relying on credit cards and personal loans to fund short-term needs like material goods, especially when interest rates are high. Unpaid debt interest can compound very quickly, turning manageable loans into overwhelming burdens. Where possible, try to use real-life examples to show how debt can grow and why it's crucial to live within your means. This typically means that if you want something, you need to save up for it and buy it rather than using short-term debt as a quick solution. Those quick decisions often come back to bite you.
• Building an Emergency Fund: Discuss the importance of having savings set aside for unexpected expenses. Whether it's a sudden car repair or a medical bill, an emergency fund can be a financial lifesaver when disposable income is tight during a cost-of-living crisis. You could even involve your children in setting aside a small portion of their allowance or earnings towards their own emergency fund. When they approach you asking for money for something they deem to be an emergency (i.e., things that get lost or broken), then you can direct them back to that money set aside for this exact purpose.
• Wise Budgeting and Tough Choices: Teach your children the value of budgeting and making informed financial decisions. Sometimes, this means forgoing immediate gratification to ensure a better outcome in the future. Really hit home to your children that reaching financial independence is about having self-discipline, especially during economic uncertainty. The decision to put a ‘lads’ holiday on the credit card will often take you a lot longer to pay back than the week you spent in Ibiza!
• Seeking Higher Interest Savings Accounts: It's not all doom and gloom! High interest rates can work in savers' favour. Illustrate how moving savings to accounts with higher interest rates can actually benefit your family during these periods. This is a perfect opportunity to discuss how banks work and the idea of making your money work for you, even in tough economic times.
• Smart Borrowing Decisions: If borrowing is necessary, such as for a mortgage, teach your children the importance of shopping around for the best rates and considering fixed rates to lock in costs before interest rates rise further. Use this as a chance to explain how mortgages work and the impact of interest rates on monthly payments.

Open Discussions

While the cost of living crisis and rising interest rates may seem like adult issues, they offer valuable teaching moments for you and your children. The real point of this article is to create an environment where talking about money is normal. Your children want to learn this stuff, and using real-life examples brings it all to life for them. Encourage your children to ask questions and express their thoughts and fears about money, and be there to support them without judgment. By having this open dialogue with your children, you are giving them a much better chance of facing potential financial challenges with confidence.