Financial lessons for your little one to ensure sound financial health
“When it comes to imparting financial lessons to children, it is never too early to start. This is something that I learnt from my experience. As a young adult, who had just entered the workforce, I remember having to struggle a lot to set the wheels rolling on my saving and investing journey. Our education system doesn’t lay any emphasis on teaching kids how to manage money and the awareness among my parents’ generation to teach kids about handling money was absent,” Romita Roy, banking professional in Kolkata narrates.
Romita’s personal struggles in managing money early on in her career led her to take active steps to introduce her son to basic financial skills. “What reinforced my idea about making my son acquainted with simple financial skills was the fact that having worked for more than 15 years, as a banking professional, I see so many young adults make terrible financial mistakes simply because they don’t know much about money.”
To ensure the younger generation lives financially fit lives and does not end up making the same mistakes as the older generation, it is important for parents to start utilizing routine activities for making them grasp age-appropriate money lessons. Money lessons started a young age can set the tone for their financial health later on. In fact, according to a study commissioned by the United Kingdom’s Money Advice Service and conducted by the University of Cambridge revealed that money habits in children can be formed as early as age 7.
Speaking in their language
Roy believes that the onus to keep children piqued in the matters of the wallet is on the parents and the relatability factor can go a long way in making children inculcate good financial habits. “You cannot explain saving to a preschooler but what you can teach them is delayed gratification. For instance, you can tell them that every trip to the shopping mall cannot entail expenses that they would want – just like how they have to wait for their turn to get the window seat in the school bus, similarly they should wait before they get their next toy.”
As they get older and their cognitive abilities become more developed, parents can move on to teaching their children that money is a finite resource and should not be wasted. If they can recognise smaller currency denominations, then you can take it as a sign that it is time for them to become familiar with using the first form of financial institution – the ubiquitous piggy bank.
Parvati Iyer, chief investment officer at Femwealth.com, an online investment management platform says, “The first step is to initiate the conversation with the concept of saving and investing. Storytelling is a great way to get started. Spending is more fun than saving, so talk about both rather than concentrating on saving. This will allow the interest to be maintained. During the summer vacation parents can encourage kids to help them with chores. In return they could be given a fixed amount of money, some which they can spend. The rest of the allowance has to be saved or invested. For younger kids this may be a piggy bank but for older kids it could be a savings account or investing in mutual funds.”
Leading by example
There is no point in adopting a pedantic stance in front of your child when your financial habits are in need of fine tuning. Roy shares, “I remember when my sister was getting married two years ago, I would spend all my free time either shopping or browsing e-commerce website. I had thoroughly indulged myself and one day and my son would see that I would receive 2-3 courier packages every day. One day he demanded he wanted a new gadget and I snapped at him citing too many expenses. Pat came the response, ‘Mummy, those are expenses you made for yourself! Why am I not allowed one purchase?’”
It is said that children’s minds are like sponges. Childhood is when curiosity runs free and observation skills are at their best. Hence, it is imperative for parents to gauge from time to time whether their financial habits can be called good examples for their children. Deepak Chhabria, CEO of Axiom Financial Services says, “A parent who keeps flashing his/her credit card and indulges in impulsive purchases cannot teach children to be careful with spending. Parents should be transparent with their kids – there is no harm in being open with children about your income and expenditure. Today kids are smart and they understand the situation and accordingly tailor their demands. But being opaque with your financial condition, especially if there are troubles brewing on the horizon can make them lose trust which is extremely valuable in this learning journey.”
Entrusting them with responsibilities
Chaabria opines that parents showing faith in their children can act as a great morale booster and make them stay on track with their learning. “Depending on the age of the children, parents can open a savings bank account for the kids – SB account under U/G can be opened with any bank and this can be a good way to inculcate savings habit and teach children about banking procedures. They should be encouraged to save part of their pocked money and deposit the same in their bank account. Many banks issue ATM card for these accounts, based on the child’s age the same can also be used.”
Once that chapter is completed and parents feel the child has learnt all that is there to be learnt with respect to savings, it can set the stage for children to pick up the rudiments of investing. Parents can make children understand that saving money is different from investing it and how simply building a body of savings is insufficient for meeting financial goals. You can quote real life examples to show that investing is a means of using money to create more money.
Iyer explains that parents can handhold children and let them foray into investing money in simple instruments. She says, “You can set into practice a method where they can define a short term goal such as a toy or an expensive gift for their birthday. Then they can save or invest for this and get a bonus from you if they stick with it. This will inculcate patience, highlight the advantage of delayed gratification and will prepare them for long-term goals. To create wealth we need to teach them about investing and how money grows. Older children should experiment investing in mutual funds. You can encourage them to put their savings for a long-term goal like buying a two wheeler by using mutual fund SIPs. They can thus understand the power of compounding and appreciate the value of being a disciplined investor.”
A lesson in investing would be incomplete without touching upon market volatilities. Now it would be a stretch to explain in detail as to how investments respond to market cycles but a basic impression of volatility should serve the purpose. The next time, you take your child(ren) to an amusement park, a ride on the roller coaster can be an extremely entertaining way to start the conversation on volatilities!
• Make children jot down their expenses – tell them that the simplest way to remember where you have spent your pocket money is to write it down. It helps them differentiate between needs and wants and cut down unnecessary expenses.
• Reward them for their efforts. This will encourage them to be more mindful of the way they handle money and keep their interest and motivation alive to learn more.
• If you are a parent to a teenager, it can be worthwhile to ask your children for their inputs while discussing major financial decisions – as you would with the adult members of the family.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.