“Money does not grow on trees!”
“First learn to earn then spend on expensive things”
“You have no idea how hard I had to work to buy that for you”
Do these statements sound familiar? I often meet parents who complain about how their children lack financial independence and don’t value money. But when I ask these parents how much have they actually taught their children about money, they are at a loss of words.
The education system too does a pretty poor job of teaching students about the practical aspects of finance. Hence the responsibility of imparting financial literacy to their children rests squarely on parents. Here are some tips that will help you get started:
FIRST STAGE [ages 2.5 to 5 years]
You may feel this is too early and kids this young may not understand the meaning of money and savings, but it’s never too early to sow the seeds of financial literacy. Of course, it needs to be done in a fun way. Start with buying two piggy banks–one is a Savings Bank and the other is a Spending Bank. Kids should be made to understand that the Savings Bank is where the money will only be put in, whereas the Spending bank is one where they can withdraw from when they want to buy something. This is also an opportunity to teach them goal setting. For instance, every child has a favourite chocolate or candy. Suggest to your child that one out of every five times she will buy that for herself from the money collected in her Spending bank. Make sure that the item has to be something inexpensive and a goal that is achievable for the child. By doing this, you are helping the child understand that parents will not buy everything for them in a heartbeat and money does not come from an indefinite source.
This may be difficult for some parents as it involves saying ‘No’ to your little one, but the sooner you get used to that, the better it is for you and your child. Because, there will be plenty of instances later in life—and not necessarily related to finances—where you will have to say No to your child for his or her own wellbeing.
SECOND STAGE [ages 5 years to 8 years]
Get your child to count the money in his/her piggy bank every three months. It’s a good way to only making the child financially savvy but also to improve their basic math skills. Teach them to maintain a simple book of accounts, wherein they can write the total amount in the piggy bank with the date. This way they will see how money grows by saving and it will also keep their involvement in the process going. At this age, your child can graduate from buying their own chocolates and candies to something slightly bigger, like a small toy or book.
This is the right age to buy a third piggy bank, which is the Giveaway/Donation Bank. This bank should be used to inculcate the values of sharing and giving; they could use the money for donating to a cause or buying something that they would like to share with others.
THIRD STAGE [ages 8 years to 12 years]
By this age, pocket money would have been introduced. Always ask for an account of how the money was spent. This can be tracked with the help of an expense sheet in their accounts book. The balance amount at the end of the month has to be put into their savings bank. It’s also the time for setting bigger goals. For example, if one of the parents’ birthday is approaching, you can remind the child that to start to save up to buy a gift or card for daddy/mummy. The money for the gift should come from their Spending Bank. After they withdraw money from that bank for spending, you can replenish it with equivalent amount in their Savings Bank. Such habits inculcate a sense of responsibility and maturity in the child.
You can also start introducing the concept of incentives by this age. So, if the child is helping you in your additional chores, you can give him/her some money for it. This motivates the child to work harder. This is also the stage when you can make a child take some monetary responsibilities. For example, take them grocery shopping; make them count the items and their prices and give them the money to pay at the billing counter; make them count the change that is returned. You may also consider starting the concept of actual banking with your child. Let your child accompany you to your local bank and encourage them to ask questions about the workings of the bank.
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Don’t forget to explain to your child what a debit/credit card is. Often children watch parents paying at a store using cards and develop a notion that these plastic cards can be used to make unlimited purchases. Put to rest all conjecture and speculation by explaining how the various cards work.
FOURTH STAGE [ages 13 years to 18 years – the most crucial years]
At this age it’s important to fix with your child a budget for everything. For instance, there should be separate budgets for shopping, mobile phone bills, socialising with friends etc. If they manage to save from one budget, they can spend it somewhere else or add the money to their savings. By now your child should have a better understanding of the banking features. On their birthday or any festival celebration, consider opening a fixed deposit for them. Involve them in the process and explain to them terms like interest rate and tenure. Make banking a regular feature in their life. If you do not already have an account for your child, open one. All the money saved by him or her can be deposited there periodically.
By age 16, you can introduce your teen to different forms of investment. Invest on your child’s behalf and explain him/her how their principal amount grows with the power of compounding. Make them do more chores during their vacation time while fixing an incentive like a salary for them.
There are plenty of age-appropriate books that your child can read to help her learn more about money matters and also to develop the right mindset towards money.