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Handy Tips to Teach Children about Money - Outside View by PersonalFN
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Handy Tips to Teach Children about Money
Sep 2, 2016

Have you ever wondered how much money you'd have today, if your piggy bank grew over the years, just as you did? Many parents wish they had learned about the principles of money management and its value in our world while they were in school. Perhaps this way they could've avoided the financial mistakes they made and the stress that came with it.

In today's world of consumerism and competition, the younger generation are triggered by instant gratification and have adopted a casual approach towards money. Like our own ignorance, children today have no idea how money is generated and regulated; the most common misconception being: "Money grows on trees". And though western and eastern notions of money management could differ, financial independence is of utmost importance universally.

Teaching children how to utilize and save money is one of the best things today's parents can do to prepare them for financial independence in the real world. Though you can't go back in time and change your financial education, you can surely inculcate the importance of money management in your children through interesting ways. Helping children understand how money is earned, saved, multiplied, budgeted, invested, and spent forms the basis of their financial education.

Therefore, we ought to take on the responsibility of creating a value system that involves and empowers our growing sons and daughters. Hopefully, this way they make fewer mistakes and achieve financial freedom sooner. Remember, a seed planted will bear a fruit in time. Hence, parents have to set a good example for kids to follow.

Here are some ways for children to adopt better money sense:

  • Bank of mom and dad/ Our Piggy Bank: Explain to your children that you will be setting up an account in their name at the 'bank of mom and dad', which could simply be "Our Piggy bank". Tell them what amount you will put into their account each week, and keep them up-to-date on their savings balance. When they ask you to purchase something, show them this balance in 'bank of mom and dad/Our Piggy Bank' and help them understand that you can only afford "x" amount of money. This would help them understand how they have to save-up to buy what they want.

    Alternatively, parents could show their children what it means to earn money by putting small amounts in the piggy bank for the little things they can do around the house and in their community. Engaging your children to set up mini businesses based on their interests, talents, and skills is another wholesome way to begin their earning-saving-spending basics.
  • Introduce children to budgeting: Budgeting can help children distinguish and strike a balance between needs and wants, as money get allotted to each head of expense. Children learn a lot by listening and observing, hence, while making a household budget, involve your little ones. This exercise can encourage kids to make their own simple budgets for their desires in life while you as parent can, of course, fine tune it; if necessary, with astute counselling.

    Parents whose children are in their teens can ask them to chip-in a small portion of their pocket money/income (maybe 10%) towards the household. Such a contribution is a good way for teens to learn money management before they leave home for higher studies or to build their career.
  • Bite only as much you can chew: In money management parlance, highlight the importance of living within one's means at an early stage of life. As a parent it is your duty to help them distinguish between Needs and Wants. Needs are basic necessities one cannot wish away, while Wants make life more comfortable, but can wait. When you are out shopping and if your children are adamant about buying things they want, speak with them politely and firmly while educating them by saying... "that is something that we do not need at this time" or "this does not fit into our budget right now." Help children understand the importance of spending money prudently. Imparting decision-making know-how in this manner can ensure the financial wellbeing of your children long term and helps them avoid getting caught up in debt by spending more than they make.
  • Rule of 1/3: This rule is simple and easy to follow and it inculcates the habit of saving. Going by the rule, one should save 1/3rd, spend 1/3rd, and donate 1/3rd of what one earns. This helps lay the foundation for basics of personal finance through savings, budgeting, and help manage hard earned money better. Also, donating money to a worthy cause can develop philanthropic qualities in them.
  • Power of Compounding: This is the simplest banking term you could introduce at an early stage in an interesting way. Perhaps use a transparent jar -call it the "Compound Interest Jar" - or "Transparent Piggy Bank" to explain how money can grow, if one saves regularly. Try to make it fun and turn it into a game with incentives and rewards. As long as there are incentives, teenagers and even adults will participate, but the real incentive is the long-term payoff of compounded growth.

    Say you have a transparent jar. Give your child a rupee to start with and explain to him/her that you will contribute 50% of the amount standing in the jar by the end of the day every day - this means, incentivise the child's saving behaviour. If you practice this for 10 days, the "Compound Interest Jar" would look something like the table below, even after accounting for a few withdrawals in the interim:
    Compound Interest Jar - The Magic of Compounding
    Day Opening
    Balance (Rs) (a)
    Additional Amount
    Invested by your child (Rs) (b)
    Amount withdrawn
    by your child (Rs) (c)
    Net (Rs)
    (d) = (a+b-c)
    Interest Earned
    (e) = 50% of (d)
    Closing Balance (Rs)
    (f) = (d+e)
    1 1.0 0.0 0.0 1.0 0.5 1.5
    2 1.5 0.0 0.0 1.5 0.8 2.3
    3 2.3 5.0 3.0 4.3 2.1 6.4
    4 6.4 0.0 4.0 2.4 1.2 3.6
    5 3.6 3.0 0.0 6.6 3.3 9.8
    6 9.8 2.0 0.0 11.8 5.9 17.8
    7 17.8 1.0 0.0 18.8 9.4 28.1
    8 28.1 7.0 0.0 35.1 17.6 52.7
    9 52.7 0.0 7.0 45.7 22.9 68.6
    10 68.6 0.0 0.0 68.6 34.3 102.9
    (Source: PersonalFN Research)

    Remember a transparent jar would help explain the power of compounding to your child better, as he/she sees the money grow, which can be exciting.

    Most psychologists believe that it isn't a sensible approach to deposit the money saved in the child's piggy bank or a compound interest jar or a savings bank account till they are old enough to understand the importance of banking. But if you allow them to touch, feel, and see their money grow using interesting techniques, it can incline them to saving and the power of compounding. Simply encouraging children to park money in a savings account (or investing) may not entice them (unless they are old enough to recognise such actions), because they may feel as if you're taking their money away.

  • Goal setting: Young ones can learn simple lessons that build a solid foundation of financial knowledge. A goal-setting activity is a good way to start. So, share some of your current personal goals and compare them to ones you had when you were their age. Ask kids to share their own goals. What does s/he want to be? What college does s/he want to attend? Explain that making plans and getting them down on paper gives us a road-map to achieve goals. It would also be a prudent practice to address the flip-side of not having written a goal sheet well. Goals are unrealized dreams and thus need to be SMART (Specific, Measurable, Achievable, Realistic, and Time Bound) as explained below:
    Goals What's not so smart... What's smart...
    Specific I want to go for a holiday I want to go to Goa for a holiday
    Measurable I will need some money to buy a cricket bat I will need Rs 400 to buy a cricket bat
    Achievable I will win the football match alone I will need the support of the team to win the football match
    Realistic By winning a lottery I will buy a cycle I will start earning and saving to buy a cycle
    Time Bound I will buy a cricket bat sometime in future I will save Rs 40 every month to buy a cricket bat in 10 months

To conclude...

At PersonalFN, we believe that parents who teach children about money at an early stage of life and keep themselves abreast with knowledge provide a very priceless source of guidance for children; making them self-sufficient, financially responsible, and leave them with a bright future.

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

Disclaimer:

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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