Photo: iStockPhoto
Photo: iStockPhoto

The ABC of money wisdom for children

Lead by example for your children to better learn the good money habits that you want them to adopt

If you think that children should be shielded from money matters, you probably have the wrong idea. “Many parents say—I came up in life with great difficulty, but I don’t want my child to suffer like me. I will ensure that she gets whatever she wants. This is a big mistake we make as parents. We should make the child understand the difficulty of earning money so that she will respect the money," said Melvin Joseph, a Mumbai-based certified financial planner and founder, Finvin Financial Planners. After all, they have to deal with money matters at some stage in their lives, and the earlier you prepare them for it, the better they will be at it when it matters most.

Children of different ages deal with money matters differently. So you will need to tailor the approach to the age of the child. “Principles of earning and working hard, and then being rewarded should be inculcated in children both at home and at school," said Dilshad Billimoria, founder and chief financial planner, Dilzer Consultants Pvt. Ltd.

You could visit orphanages or slum homes with your children to help them understand the differences in living conditions. Remember, children learn more from what they see happening around them than from they are told or taught. If they see you swiping your credit card for everything that catches your fancy, it is difficult to make them see the importance of distinguishing between needs and wants and to use debt with caution. So, make sure that you live by what you teach.

Money and work

Children need to relate work to earning money. It teaches them that there are no free rides in this world. The money earned gives them the independence to choose how to spend it, albeit, within the broad rules of what is allowed at their age.

As they progress through childhood they need to learn that earning is commensurate with the type of work done, and there is a responsibility towards the work undertaken that comes with earning.

“Paying pocket money for chores at home, like taking the dog for a walk, cleaning a shelf, laying the table at mealtimes everyday, or doing the laundry, inculcates a sense of responsibility and pride in contributing to household chores. They can earn while they do such chores and have fun. Money games can be played with children at various ages," said Billimoria.

Spending and saving

Lay down broad rules of how the money earned may be spent but leave it to the child to decide how they want to spend it. Help them recognise and choose between needs and wants. Introduce the idea of saving as a way to provide for big ticket purchases in the future.

“Give pocket money depending on their age and place of living. You could also increase the amount a bit every year to make them understand the concept of inflation. Open a bank account and deposit the surplus there. You can gradually do an online transfer of pocket money to her account. This will teach her the use of debit card and ATM card. If you see increase in surplus (due to less spending), encourage her to invest it," said Joseph.

Show them how to set goals and to save for them. Saving for goals will necessarily take their earning into consideration and thereby establish a link between what they earn and what they can afford to spend. Don’t forget to praise and encourage children when they save and reach goals to strengthen the positive feelings.

Set family goals, such as a holiday, and save together for a shared experience. A bank account in the name of the child can be a motivator to save more, especially when they see interest earned adding to the balance.

Basic money mantras

Children should be introduced to the practical application of basic money ideas like compounding and time value of money when they are ready for it. “The children should be asked about the things they can and cannot buy with money and how to get money to buy things they need. For smaller age group, the approach has to be fun and learn. It can be through piggy bank or games. For children of higher age group say 12 or more, the approach can be through financial literacy and involvement in family activities on spending, saving, investing and borrowing," said Prakash Praharaj, founder of Mumbai-based Max Secure Financial Planners.

You could take the help of calculators and visual illustrations available online to demonstrate how compounding works and drive home the advantage of long-term savings.

“Children can be taken with the parents to the bank to observe activities inside the bank branch and also encouraged to open bank accounts.They can be shown withdrawal through ATMs and operation of internet banking.In shopping malls,the children can be given a certain sum of money say 500 and asked to buy items of their choice from their alternative preferences. In the process, they can be taught how to spend in the right way," said Praharaj.

Keep the math simple and make it interesting and fun, especially if they are scared of numbers.

Inculcate discipline

Managing money is all about making choices and disciplined decisions. You have to make choices on earning, spending, borrowing, saving, investing and sharing. And there is a cost for not making timely decisions. Allow them to bear the consequences of their choices.

“Ask them to count their pocket money and divide it into buckets of spending for fun, savings for the future and savings for the underprivileged. Ask them to take up odd jobs during holidays to earn some extra money. But don’t pressurise them about earning and savings," said Billimoria. Let them learn at their own pace, and even from their mistakes. For example, if they choose to spend on a phone accessory instead of saving for the school trip, don’t step in and bridge the shortfall for the trip.

Learning experiences

Children learn best from experience and only what they use. Let them be involved in the practical aspects of making money decisions and executing them. Get them involved in deciding where to buy from and making the payment so they learn practical money skills. For example, you could allow even children as young as 3 or 4 years to hand over cash while buying groceries. If they recognise numbers, ask them to choose the correct currency notes.

Children learn from the choices parents make between needs and wants. Let them make independent decisions and learn from their mistakes. Let them know that you, too, make mistakes, so that they are not disheartened by their mistakes.

Children may be unwilling to deal with money matters primarily because they don’t understand how it works. It is important to take the mystery out of it by talking about it openly and simply. It helps to keep the conversation real and to what the children can relate to. Talking about money is also the opportunity to put the role of money in perspective for the children, depending upon the life values that you want to give them. And lead by example, especially where they have to learn to make the less appealing choices.