We’ve often heard the adage “money doesn’t grow on trees”—but how frequently do we teach our children where money actually comes from, how it grows, and why we need to value it? Just as we inculcate other habits in our children at an early age, so too with money management, it’s a good idea to start young. In fact, a University of Cambridge study showed that by age seven, kids are able to understand and develop several money management habits.
Here are some basics concepts we can teach our children about saving, spending, and earning.
A Penny Saved
Warren Buffet famously said, “Don’t save what is left after spending, but spend what is left after saving.” It’s a good idea, therefore, to begin our children’s financial education by teaching them that in order to be spent, money must first be saved. One way to teach saving is by getting your children to collect money they get from gifts and their allowance in a glass jar, so that they can see their money build up.
Give young children their allowance in smaller denominations—for example a mix of 10-rupee notes and 5-, 2-, and 1-rupee coins instead of a single 50-rupee note. This not only gives them the satisfaction of filling up their “Savings Jar”, but also helps them understand the concept of different denominations and how smaller value currencies add up to higher value notes.
Motivate children to save by having them work toward a goal such as a coveted toy. This not only helps teach them the value of every rupee saved, it also introduces teaches delayed gratification—the idea that you can’t always get what you want immediately, but sometimes have to wait and work toward it.
Dipti Singh, former investment banker and mother of two, says enforcing delayed gratification has worked as a “cornerstone of financial discipline” for her children. “If they want something bad enough, they decide to save,” she says. “Our daughter has been saving for an iPad for a year by sacrificing on small indulgences. She’s gotten frustrated, but keeps coming back to it. This gives us opportunities for conversations about different learnings, including understanding the concept of finite spending.”
Learning From Mistakes
Speaking of spending, you may also want your children to maintain a ‘Spending Jar’ in which they keep a percentage of their allowance for weekly treats. Allow them to make mistakes such as spending their weekly money on a single high-value item—such as a new superhero figure. The mistake will teach them to budget their money wisely so it lasts them through the week.
The Value of a Budget
Budgeting is useful because it helps children learn to make choices. Singh maintains that it’s important for children to navigate choices early on because as adults “they’ll need to contend with situations when they either spend their money immediately or invest it for future benefits.”
Take your children to the supermarket after establishing a budget and let them make decisions. For example, we could buy this expensive candy for you, but then we have to sacrifice on the bread we need for breakfast. Understanding how one choice can impact another helps children differentiate between needs (a daily meal for the family) and wants (an optional indulgence).
A Penny Earned
Another way for children to value money is by experiencing the effort of earning. For example, Singh’s daughter earns part of the money for her iPad fund by doing chores, helping her “realize how difficult making money can be”. You could also let your children earn treats through exemplary behaviour or by accomplishing academic or personal goals.
Be careful, however, to first establish certain behaviours that you expect from your children regardless of rewards to prevent them from getting into the habit of only doing something for a payoff.
Paving the Way Forward
As your children get older, you can take them to the bank and help them open a savings account. This is also the ideal time to introduce the concept of investing—the idea that money can grow. Teaching your children to invest early builds further on ideas of budgeting, saving and planning for the future.
A wise investment plan to begin with is a Unit Linked Insurance Plan (ULIP), as it provides investment options along with a risk cover for the policyholder. The type of ULIP you choose depends on various factors including your risk appetite. HDFC Life, for example, offers a variety of ULIPs, including ones you can customize for your child.
However you choose to expand your children’s financial education, laying the initial building blocks when they’re young is the first and most important step.