Schools teach children many things, but seldom the basics of financial planning. How many times have we rued not knowing how credit cards work, how much interest we will earn, how much tax to pay and what not? Unfortunately, many of us have had to learn about money and its management the hard way. However, we can easily save our children the heartburn by teaching them the basics of money management. Here’s how:
When to start
It’s never too early. You can start talking about this the moment your child starts to understand that it takes money to buy things. Of course, the method of teaching would depend on your child’s age.
“It’s not as if children don’t understand about money. The moment you hand over cash and let the child transact, say, for a chocolate or cookies, she knows how it works. So, it is never too early to teach her about money. The moment you take the first step of handing over cash to your child, it is time to teach her about investing too,” says Surya Bhatia, a Delhi-based financial planner.
And don’t forget that even being allowed to hand over money to a shopkeeper gives the child a thrill and makes her feel responsible.
Keep it simple
Though people love jargon, avoid using such words. It doesn’t help at all. Use simple language; start with the easier concepts. “It is always good to use simple language to give clarity. Don’t ask a child to just read newspapers or magazines to understand about money and investing. Instead, first explain the concept, maybe in a game form, and then let her do the reading,” says Anil Rego, a Bangalore-based financial planner and chief executive officer of Right Horizons, an investment advisory and wealth management firm.
A lot will also depend on your child’s age. If she is young, she may need time to understand.
Concept of saving
The mantra to building wealth is first save and then spend. It is very important to make your child understand this as this concept can go a long way in her financial learning and will, hopefully, stay with her during her adult life. “Many financial problems in later life are due to ignorance towards financial planning. Many don’t talk about money for ages and end up being handicapped in finances,” says Suresh Sadagopan, a Mumbai-based financial planner.
This is an excellent chance to demonstrate as well. For example, ask your child what she wants to buy. It could be a video game, a toy, a book, or anything else. Write down the cost in a notebook, which could also serve as a ledger. Then explain how many currency notes it will take to reach this amount. For instance, five of Rs 20 notes will amount to Rs 100. Try to get her into the habit of saving small amounts every week or every month (even every day).
If what your child wants is a bit expensive, tell her that you will put in as much as she saves. So, if she manages to save, say, Rs 200, put in a similar amount from your side. This not only gives her more incentive to save, but also makes the final amount less daunting.
“To understand the value of what she gets, the child needs to know its worth in monetary terms too. The easiest way to induce the habit of saving is to ask the child to pitch in when she wants to buy something. Instead of buying everything for your child, give her the pocket money and allow her to spend on things that she wants to buy. The amount can be small depending on how much you are comfortable with. This way you can also keep a check on where the money is being used,” adds Rego.
Introduce money devices
Banking products are the easiest to explain as we transact with our bank almost every month. You can start by opening a bank account (after she reaches a certain age). You can introduce bank fixed deposits to an older child as she would have learnt the concept of compounding interest at school. The best way is to include her academic knowledge into day-to-day money management activity. Then you can slowly introduce her to other instruments such as stocks and the like.
Inflation eats into savings. You speak to any financial planner and they will tell you that people are uneducated about real returns. While investing, many don’t bother to think about the importance of inflation-adjusted returns. So, it is important to teach her how inflation works and what it can do to her savings. Teach her how to calculate inflation-adjusted returns and its impact on her money life.
Take it easy
Not all children can learn at the same pace. Teach in a calibrated way. “I know a family where the child takes care of the grocery bills. It was slow progress but has worked wonders,” says Rego.
Teaching about money is like teaching how to walk, read or write—it’s basic, it’s important, but it will not happen in a day. Patience remains key.