Do you know why Monopoly became such a popular family game? It is because it teaches children a variety of financial lessons while having fun. A classic board game used by parents, Monopoly educates kids about budgeting and spending thereby making the younger ones aware of the grown-up concepts of financial management and planning.
We live in a world of virtual finances, currencies and lightening financial transactions. Learning through trial and error, more importantly experiencing, understanding of budgeting along with the significance of saving money and handling credit at early age should be of utmost priority in their formative years.
Establishing a vibrant sense of monetary habits at an early age not only helps in developing the initial financial knowledge but also helps in being ready for future financial matters, obstacles including savings and credit. As an adult, we do concede and understand the criticality of having a secure economic foundation. However, educating your younger one about savings and credit may not be on top of your foundation radar. This is one of the biggest mistakes parents unwittingly make by keeping their children away from major life lessons.
Parents don't often realize that they have a drastic influence on their children, as the person they will be tomorrow will have a lot to do with the environment they grew up in as. It thus won't be incorrect to state that children learn how to spend, save, and invest their money by directly mirroring their parents' financial decisions. Giving your child the freedom of expenditure and money management will help them grow into adults who can achieve financial security and success.
Your children will have to make a lot of financial decisions throughout their life and it is up to you as a parent to ensure to prepare them to handle it wisely, intelligently. Then why wait, the time is now. Here's a breakdown of credit and savings topics you might want to discuss with your kids and when it might be appropriate:
Early elementary school
Saving jars: Let your child have three saving jars, popularly known as "piggy banks" with three labels, "save", "spend" and "donate". Set certain rules and targets and if they abide to it, they can earn themselves a treat. For instance, if the "spend" jar is full with the allowance that they have collected, they can have an extra ice-cream scoop of raspberry cheesecake that they have been craving for since long. Whereas the donation jar will give them an idea about the less fortunate souls thereby eventually making them appreciate the importance of money more.
Introduce budgeting: As children earn an allowance or get gifts from relatives, they can learn how to make that money last. Help them sort their money into "spend" and "save" thereby encouraging them to set spending limits to stay on track.
Middle to late elementary school
Addressing curiosity: It's a cue that your children are ready to learn more when they start enquiring about your spending habits and credit cards. For instance, your children may ask how money "gets onto" your credit card or the "plastic card" used while shopping. Or, if you mention not buying something you can't afford, they may ask why you can't just use your credit card to buy it. Helping them distinguish between money saved and money available to spend, can be great teaching moments.
Explain how credit and debit works: It is never too early to make your child aware of the financial tools that are available in the market for convenience and more. For instance, a credit card is a tool that allows you to borrow money instead of having to pay cash and there is "no" actual money "on" the credit card. However, there should be an emphasis on paying the borrowed money back every month - and if you don't repay it all at once, the company may charge fees or a percentage of what you borrow in interest. You can also give your child a debit card of with a certain amount to manage their own expenses.
Hands-on credit lessons: If you give your child a regular allowance and they ask for it early because they spent their money, discuss budgeting and how credit works. Consider loaning them money and charging interest so they understand that borrowing money can come with a price.
Show and tell: In the era of a virtual world where online shopping is at its peak, your children may want to purchase certain things from their savings, credit debit accounts to have "sole proprietorship" of that product. Let them purchase from an account that has limited credit/debit balance and make them aware of the pragmatic payment system. Show your children your credit card statements and point out to them how long it will take to pay off your balance and how much extra you will pay in interest if you only make the minimum payment each month.
Credit reports as report cards: You can explain that credit history is a little like a report card. When you maintain a good credit history-i.e., good "grades"-you may pay lower interest rates on credit cards and loans. If they are interested, show them how you can check your credit reports. You can also talk to them about what a good credit history means and what makes a good credit history.
Technology to help them keep a check on their account for budgeting and saving: You can guide your teenager to keep a tab of their account through different apps and banking sites. Explain to them the difference between the spending cards, as well as some of the risks associated with debit cards (they may lack the protection of credit cards should they be lost or stolen).
Get real about identity theft: Explain how identity theft can use personal information to apply for credit in their name-and that if identity thieves don't make payments, it may impact your teens' credit history aka report card.
Senior year of high school and college
Cover good vs. bad debt. Late high school is a good time to talk about student loans and explain that some kinds of debt can be beneficial in building a credit history.
In the age of procuring and utilization of funds, financial management is of utmost importance for a family's security. It may seem like your children are too young to understand the ins and outs of savings and credit, but the sooner they start learning, the better. Teaching them about credit early may help them avoid some common credit mistakes that can occur in early adulthood, such as missing payments or overspending.
By Manu Sehgal, Business Development Leader, Emerging Markets, Equifax