How to educate your children on money matters with these basic lessons

NEW DELHI: Parents must understand that finance is undoubtedly one of the most important conversations they must have with their growing children. Early lessons on money and finance can help them avoid issues at later stages of their lives. As it is not always possible for schools and colleges to offer courses on personal finance, parents must assume the responsibility of educating children on money-related matters.

In this piece, we look at some of the prominent financial lessons that can help your children grow financially fit, especially if they start learning about personal finance early in their lives.

Explain the fundamentals of saving

It is quite natural for money to burn a hole in the pockets of young kids as they often may want to spend the gift money they receive for birthdays and holidays. However, as parents, it is crucial to make them understand the many wondrous benefits of delayed gratification. As your kids desire something special, you can use that opportunity to talk to them about financial savings for more significant purchases.

Experts say young kids must learn to stop spending their allowance on smaller and immediate pleasures and save for the future to make a bigger and better purchases. They may sometimes require sharing the expenses with you or covering the entire cost themselves.

Educate about spending smartly

One of the key pillars of financial understanding is distinguishing between wants and needs. Sanjiv Bajaj, Jt. Chairman and MD, Bajaj Capital Ltd, said, “Your kid must understand what is nice to have and what is necessary to have at a given time. It is quite observed that young kids often fail to understand sophisticated topics, the only reason being a lack of required knowledge. It completely lies on the parents on how they refine the understanding of their kids about what constitutes a need. You can start by citing an elementary yet effective example that we spend first on basic needs like food, clothes, shelter and medicine. Meanwhile, wants such as vacations, toys, and entertainment are secondary and must only be bought after basic needs have been met.”

Build credit knowledge

Credit is the only technical aspect that kids need to learn to become financially literate and understand how money works. Credit is an individual’s permanent transcript for life. Most children don’t necessarily know that credit means borrowing from others, which comes at a cost. As parents, you must teach them the importance of having credit in life, if required. They must learn that credit is a vital and valuable tool that they can also use to keep track of monthly spending.

However, teaching young children about credit can be daunting. All your kids need to learn is how to use credit to their advantage in the best ways possible.

Understand how time helps grow money

While teaching various financial lessons to your kids, it is equally important to explain to them that money has a time value. Bajaj said, “You must introduce your growing kids to some complex financial terms like compounding interest and explain to them how money invested for a long time in dedicated financial products has the potential to grow significantly.”

He added, “It was much easier to introduce these terms to them when savings accounts earned higher interest rates, but the time has changed. With interest rates falling drastically, you need to teach your kids to invest money in meaningful sources so that it grows over time. Most importantly, your kids must know that investing money comes with its share of risk and losses in case of a down market, and they must learn to deal with such situations.”