Teach your children about money, not stock markets

Our children learn the complexities of science and mathematics in their early years of school. But they do not study finance — a subject they would use all their lives. Several attempts have been made to correct this anomaly. I recently had the opportunity to review a lot of these materials, which seek to teach the basics of finance to older children, from class nine onwards. I believe there is a need to seriously consider financial literacy for children. We must go beyond managing pocket money, saving and basic financial maths.

The first lesson in finance for kids, to my mind, is that money is a limited resource. There is always an opportunity cost to money. We all make choices as to what we will do with our money, and these choices impact our lives a lot. These choices also become habits as we grow older. When we speak of financial independence, we refer to the degree to which we are able to make decisions to spend money without worrying about its alternative uses. Children need to learn how these choices are made. In a household that has limited income, running a tight budget might be the only way to allocate money. These choices determine what is spent or saved. Before they begin to make their own choices for money, children need to know how to make these decisions.

The second lesson is the ability of productive assets to generate income and wealth. Children’s understanding of how money is generated might be simplistic. Mine thought that money came out of the ATM machine, for a very long time. Beginning with seeing themselves as human assets that can generate income over a long time, children need to know what assets are, how they are created, how they generate income and what are the risks involved. The risk to human assets comes from poor choices in knowledge and skills. Before we teach them about bank deposits and equity as asset classes, they need to understand choices between safe and risky careers, involving them as human assets. They have the choice of becoming entrepreneurs or seeking a steady income-yielding job. These decisions are better made when they understand that they are the core asset, which they will use all their lives.

The third lesson is that financial assets are supplements to wealth and income that the human asset creates. Many youngsters whom I speak to tend to think that money is made in markets by trading and speculating on stocks and derivatives. Just as principles of physics help them understand how things work, they need to learn how financial assets work. If deposits are safe and generate small return, and equity is risky but with a higher return potential, they need to know why they co-exist.

They should be able to see how assets are built by businesses and understand investments as the route to participating in asset-building endeavours. Investment research and business analysis should be seen in the context of assessing assets quality into which they may invest their surpluses. Children should be able to see their money lives as involving investment decisions on a routine basis.

The fourth lesson is on choices between spending and investing and management of cash and liquidity. Their need for money and their incomes will not match, requiring them to borrow, save for a future need, or allocate money between today and tomorrow. The use of credit cards and loans at a simpler level and financial planning at a macro level, are all directed to smoothen the cash flows in their lives. Children should know how they can manage these imbalances and still remain solvent and wealthy.

Teaching children about money is serious business, drawing upon the principles of finance, asset creation, risk and return. It needs a more intense treatment than asking them to save their pocket money, draw a monthly budget, or gawk at stock markets as money-delivering slot machines.

The writer is managing director, Centre for Investment Education and Learning. Views expressed are her own