November 14 is celebrated in India as Children's Day. On this day, you as a parent can make a start by teaching them about money. Here's how.
Teaching very young children can probably be only through games. Games like Monopoly provide a fantastic platform to teach children about real life concepts like investing in a property, assets, getting rent, etc in a fun setting. The learning can be manifold if the parent is present and briefly explains the real life situation which is being played out in the game, in simple terms.
Teaching children about investments
Parents and other elders give cash as gift for birthdays or festivals. This is usually put in the child's piggy bank where it remains for a while. When it accumulates into a fairly big sum, the parents invest it in a fixed deposit, in the name of the child. The same thing could have been turned into a learning opportunity for the child.
The child can be asked to maintain accounts and when the amount reaches, say Rs 2,000 or Rs 5,000, it can be invested as FD or into other investments. The child can be told to monitor this and alert the parent when it reaches the figure. The child can, thus, be involved while investing the money.
At this time, the parent and child can decide and discuss as to what goal this investment is for and how much more investments would be needed for meeting the goal. The child can find out the value of the investment at regular intervals. This way the child will learn about investments, investing for a goal, monitoring investments and a familiarity with investment instruments.
Use concepts children can grasp
Children need to understand why we are saving money. Most of them don't have a clue. Even when they are told that it is for their education or for retirement, it does not register. It would be easier for them to relate if it pertains to things that they use. For instance to buy a bicycle, the child may need to save for two years. Then he/she knows the value.
Similarly, the child needs to be explained in terms of things he/she can understand. Many times children casually remark - "only Rs 20,000", without understanding what it really means. It would make sense if someone explained to them that they would be able to buy a Mac Aloo Tikki every single day for the next two years and three months. Now, it becomes clear that Rs 20,000 is a lot of money.
Children also need to understand the need to save for a goal - say a PS3. Either the parent can pay for it, or the child can save for it. If parents make it clear that money needs to be saved and then spent, it is a fantastic exercise in teaching the child about saving and then spending. To make things interesting, there can be many promos and offers apart from some pocket money every month, from which to save for the goal.
There can be a bonus for maintaining the money accounts well, for regularly saving the targeted amount every month, for learning new things about money, and so on. Then, there can be a final bonus when the target is reached. Parents need to channelise behaviour through such positive reinforcement. They need to learn a thing or two from credit card issuers, on promos and offers.
Concept of risk
The problem is that even elders don't understand this well. Risk is a four letter word for many. Even this should be explained with concepts children understand.
Venturing out in the dark is risky and scary proposition for a kid. However, venturing out with the family is not least scary. The risk inherent in the situation is the same. It was perceived differently based on what they did. Similarly, investing in equity without proper assessment and for the short term is risky.
An investment after proper due diligence for long term is far less risky. Both are equity investments, but one is risky and the other is much less so.
Similarly, a child needs to understand the risk-reward equation.
A child attempts to complete holiday homework in two days, for which he/she is willing to forgo playing in the evening. In return he/she wants permission to go for a holiday with friends for three days. This child probably understands the concept of risk and is willing to take it. A child who assumes that parents will not allow him/her to go on the holiday and settles for playing in the evening, is probably risk averse.
There is lots of scope to teach children. Merely ensuring that children are educated is not enough. Financial literacy is also important. That can make all the difference for children, when they grow up. It is in the hands of parents to create a financially savvy generation.
The author is founder, Ladder7 Financial Advisories
MAKE YOUR CHILD MONEY WISE
- Don't shy away from discussing money matters at home
- Teach children how money is earned and spent
- Practise thrift yourself if you want your child to learn about saving
- Use games like Monopoly to teach concepts like rent, property tax and loan
- Open a fixed deposit and show your child how to monitor it regularly
- If children want to buy a new game or bicycle encourage them to save money in their accounts