From a young age, we lay stress on sharpening our children's social, academic
and extra-curricular skills. But, often we leave the training in financial management skills
for a later day. However, if we want our kids to be competent in handling their finances when they grow up, we need to start training them in money management
from a young age.
Financial products for children:
Recognising the importance of making kids proficient at money management, banks
have launched a few products aimed at achieving this goal. A key initiative in this direction is allowing children above 10 years to open a savings account.
These minor-operated accounts can be managed by children with minimal or no supervision from parents. With defined withdrawal limits and various attractive benefits, these accounts are designed to impart confidence and a sense of responsibility among children.
In a similar vein, pre-paid cards have also been launched for children, which are linked to the mobile numbers of their parents. Parents can decide the amount of top-up on such cards, which are then given to children along with the card pin code. While kids have the liberty to spend the money as they please, parents can monitor their spends through updates on their phone via card-related apps.
To make learning about money a fun activity, you can incorporate these products into simple lessons that you can design to teach your kids about personal finance.
Go from simple to complex: Young minds are always curious and highly malleable. They are more receptive towards learning new concepts and experiencing new things. You can link key financial lessons to fun activities for teaching healthy financial habits to your children. Based on your child's age group, you can start with simple financial lessons and then introduce more complicated concepts as they grow up (See table: Right lessons at the right age).
To ensure that your kids imbibe the right financial habits, use your discretion in deciding the best time to have financial talks. An action repeated over a period of time becomes a habit. Hence, regular, practical exercises embodying key financial concepts can help you cultivate positive financial values in your child. Here are some of the key lessons they need to imbibe:
Patience is a virtue: Investors are often advised to be patient and have a long-term horizon for making the most of their investments. Being patient if they wish to excel in any sphere is a lesson we must teach our kids. A simple way to develop this habit is by spreading out their demand for toys, new clothes or a picnic over a period of time, instead of offering them instant gratification. When they throw a fit, explain to them that they have to wait for good things to happen. And if they are patient, they will enjoy the fruits even more.
Earning money is difficult: Teach children the value of hard work, dignity of labour, and the importance of saving with one simple exercise: Link their pocket money to household chores. Define the amount that will be given to them for each activity they do. These chores can include cleaning their room, filling water bottles, polishing their shoes, etc. A small remuneration can be linked to simple activities and this amount can be increased as the chores become more difficult. Part of the money that they earn can be given to them as cash and part can be deposited in their saving accounts or topped-up on their pre-paid cards.
Live within your means: Allow children to indulge in discretionary spends only from their pocket money. Define spends, such as a McDonald’s meal or a new football, which they must buy from their pocket money. If in a particular month they fall short of the amount they need to buy what they want, ask them to wait until the next month for the same. If they are persistent, you can introduce the concept of borrowing and lending by giving them pocket money in advance and deducting this amount from their next month’s allowance. You could even charge an interest.
Set clear goals: Ask your children to define a big goal towards which they want to save. Be it a plane ticket for a holiday or a new bicycle — help them plan how they are going to achieve these goals. Let them set a time frame and calculate the amount that they will need to fulfill their goals. You can work out chores which they can do to accumulate the required amount of money. Certain incentives such as a bonus can be offered on completion of milestones, such as on accumulation of every Rs 1,000. This will keep them motivated and on track to achieve their goals.
Start early: Just as a headstart in a race improves your chances of winning, starting the process of investing early on improves your chances of accumulating wealth. This is because the magic of compounding kicks in to make your money work for you. Encourage your kid to start an SIP with you every month from her/his pocket money. Credit a certain percentage of interest every month on their savings to help them experience the magic of compounding.
Read the fine print: Doing thorough research is important for making sound financial decisions. Plan grocery store trips with your kids. Ask them to read the prices and expiry date on a product before buying it. Encourage them to compare the price and features of different options available and then pick the right one. This exercise can be extended to teach them about budgeting by giving them a certain amount of money and a list of items they must buy with that money.
Lead by example: Children pick up habits from their parents. For kids to imbibe healthy financial habits, it is important that parents demonstrate good practices through their own behaviour. Hence, avoid having fights on money matters in front of your children. Make financial planning a family activity and encourage your kids to share their views. Display financial discipline, and keep a healthy asset mix in your portfolio.
Even if you can afford to create a financially comfortable future for your children, remember that they will not truly value this luxury without understanding the real value of money. Use these tips and make a fresh start this Children’s Day in grooming your child to be a financially responsible adult.
The author is MD & CEO, Axis Securities