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7 ways to teach your child about money - Outside View by PersonalFN
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7 ways to teach your child about money
Apr 11, 2014

A seed planted early will bear a fruit in time. The same principle applies to children. As teenagers or sometimes even as young adults children often tend to behave as if money grows on trees. As parents, the earlier you create financial awareness among your children, the lesser mistakes they will make as they grow up.

The following points may be kept in mind while teaching your child about money

  • Start early: Children must be taught about money from an early age. For instance, you can give your little one a piggy bank to save some money. This will instill the idea of saving right from childhood. For little older kids, you can start a monthly/weekly allowance, which will help them learn how to handle money. It is also wise to hand in notes of different denominations (Rs 100, Rs 50, Rs 10) while giving them their pocket money. This will further encourage them to save. Also, easy to understand and light hearted discussions about the value of money and how it is earned are a good way to begin with.

  • Rewards and Expenses: Set some monetary rewards for doing some basic chores (such as paying electricity and telephone bills etc.) in the house. This will help them to relate money with work. Also, encourage them to pay certain personal bills from their monthly allowance. For example, most teenagers use mobile phones. You must give them a budget for the usage and let them pay for their own expenses. This indirectly will limit their unnecessary expenses and create a sense of spending money sensibly.

  • Shopping with your child: It is a good idea to take your little boy/girl out when you shop for grocery or other items required in our daily lives. Children learn from what they see. Hence you should first plan your spending before entering a mall or supermarket. The next step is to let the child observe the way you compare the quality, price, warranty etc. before buying a particular product or service. This will help them understand how you indulge in need based spending and avoid impulsive purchases. As a parent, it is also important for you to not buy unnecessary and extravagant gifts for your children to meet their demands. This sets an impression that they only have to demand every time they want something. It is more prudent to explain them the difference between 'needs', 'wants' and 'wishes', which will help them to make financial decisions in their future as well.

  • Banking Transactions: Exhibit to your children, the concept of earning interest on savings. For example, pay them little interest (rewarding them) on the money they have saved out of their monthly allowances. Teach them to calculate the interest they have earned. This will enable them to understand the power of compounding. For grown up kids, who have already understood this concept through knowledge imparted in schools or colleges, lead them into opening a bank account for saving money. This will help them save money systematically and also keep a track on their expenses. Use every day live examples to explain concepts to your kids. For example, if you are out for dinner at a restaurant, explain your child how the tax is calculated on the bill amount and how a credit card works in bill payments. Allow them to go through your personal bank statements and credit card bills. This shall educate them about the effect debt can have on your outflow of money and will also make them aware about the family's financial standing.

  • Setting Goals: Make your children write down their short term (such as buying video games, clothes, shoes) and long term goals (such as purchasing a bike or saving for college education). This will help your child prioritize and realize his/her goals. Create awareness among them about the impact of inflation and help them calculate the approximate future value of these objectives. Encourage them to start saving for each of these goals separately. You see, this will inculcate in them the habit of saving for their future and make them more responsible. In a way, you will be shaping their vision and creating an understanding for the need of a financial plan.

  • Let your child make mistakes: For some time, it is wise to let your children make mistakes while handling their share of money and take their own financial decisions without any interruption. This is because a lesson learnt from one's own mistakes is never forgotten. For example, if your child spends too much on superfluous expenses, he will find himself incapable of purchasing something from which he could have fulfilled his short term goal (such as buying headphones or new clothing). This will force him to think before spending money impulsively in the future. Having said that, you must also keep a track of his spending habits by asking casual questions or tracking his/her bank statements or asking for an account of the money spent by him / her. It will not be prudent to let your child make the same mistakes repeatedly.

  • Involve them in your financial decisions: You should involve your children while taking financial decisions for the family, especially the ones that will affect them. For example, when you are planning a family holiday, then how to budget and save for the same, or when you are creating a financial plan for investing your hard earned money for your child's higher education or for your retirement. You see, children learn a great deal by observing. Discussions like these will create curiosity in their mind about money and drive them to think about investing it.
You can consider imparting all this knowledge through various games and books which teach kids how to handle money and related concepts in a simple and fun manner. While several board games (such as Monopoly, The Game of Life, etc.) demonstrate the importance of saving and money skills; books teach kids vital facts about money and investing it through several illustrations and pictures.

As parents, you must also keep in mind that you are your child's biggest role models. They learn from what they see. If you have big debts, loans and unclear financial plans, your children are bound to perceive that as normal and make the same mistakes as you did. Hence it is imperative that they see you saving and working towards your financial goals in a systematic manner. In other words, you must practice what you preach to your children.

PersonalFN is of the view that ill-use of money can be detrimental to people of any generation. It is important to understand the value and power of money. Educating and motivating your children to use money efficiently will make them financially independent and help them avoid errors when they enter adulthood.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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