How do your kids really learn to manage money?
Do they learn about money at school? From their friends? By watching TV? By buying snacks from the corner shop after school hours to eat on the bus?
Probably all of these. But as with any other matter, a little knowledge can be a dangerous thing.
Most kids don't really learn to manage money, they learn to spend what they have and wait till they get more. Kids today, just like when we were kids ourselves, are more about instant gratification and less about planning for the future.
There's usually no practical money education at school, their friends might know about as much as they do and also this is not something children talk about, and if they try to learn by watching you things might seem complicated and they will simply become confused.
Common sense dictates that the younger they are when they start to learn, the more they will absorb and respect what you teach them. Kids today are growing up faster than you would believe. They develop wants and needs and financial lifestyles at a very young age.
By the age of 6, your friend's daughter will be asking for a cell phone and will want fun events at her birthday party to be better than events at her classmate's party. At age 8 your neighbour's son understands your computer better than you did at 16, and he wants a cell-phone and the Nintendo Wii too. While children may have financial needs, wants and demands, this is in fact the best age to help them understand money.
The 3 S's - Spending, Sharing, Saving
As a parent, you're going to take care of everything. School tuition fees, new clothes, shoes, books, food, shelter, presents... it's on you up to a certain age.
So what's the allowance for? What your child needs to learn is that the allowance is for 3 things:
- Spending: Personal items, snacks, toys, clothing items, entertainment
- Sharing: Birthday presents for family members, friends, classmates, giving charity
- Saving: For very special occasions or bigger purchases, your child can learn to start saving money a little in advance
And as your child gets older - we can add Investing to the list.
Money Education for a Child Aged 4 to 8
- The main thing to do here is ensure your children can first identify money and are good at basic math money transactions. Help them know the difference between a Rs. 10 note and a Rs. 100 note, a Rs. 100 note and a Rs. 500 note and so on.
- Have mock transactions with them when they are very young. 'If I like these pens that cost Rs. 25, and I give the salesman a Rs. 100 note, how much should he give back?' and so on. For a child closer to the age of 8, try this - borrow money from them for a few days and pay it back with interest. The math might be beyond their level, but they will understand in simple ways how interest works. With a little extending, this can become a practical exercise in compound interest.
- When you go to the grocery store, ask them to choose a sweet, find out how much it costs and give them Rs. 10 to buy it. They can decide whether to get 10 sweets for Re. 1 each and share with the family, or a chocolate bar for Rs. 10, or something else. Let them choose what they want and carry out the transaction themselves. And if your child loses the Rs. 10 note, don't replace it on this grocery trip. Explain gently but firmly that money is important and should be handled with care.
- At a young age, the allowance should be very small and should be given once a week. Young children cannot plan for expenses of the month, the best they can do is 7 days. They should also get into the habit of writing down all their expenses on a piece of paper stuck on their cupboard. Savings should go into a piggy bank or a coin pouch.
Money Education for a Child Aged 9 to 12
- As your child grows up, his or her money responsibilities should gradually increase. It's at about this age that parents start to tie allowances to household chores. 'Clean your room, put your shoes books and clothes away, finish all your homework, clear the dining table, and you will get your allowance.'
This is potentially a bad idea.
If this is done, some children might feel entitled to money simply because they are being well behaved. What they need to learn is good behavior is simply part of being in a family, and everybody does it. Your kids should feel responsible to contributing to household chores, irrespective of their allowance. If their responsibilities are not fulfilled, a better way to teach them might be curtailing of freedom like TV time or bedtime curfew.
- Around the age of 10 or 11, start your kids on a savings plan. Open a joint bank account as this will allow your child to have a little freedom in their purchases. If the lessons they learned from ages 4 to 8 were strong, they will be responsible in their expenditures. If not, wait till they are 13 or 14 years old before you do this.
- Encourage charity. It will not only help your child do good in the world, but also learn the difference between being privileged and being under-privileged. With this knowledge will come understanding and appreciation of their own lifestyle.
- Encourage discerning shopping habits. In this age bracket, kids tend to have more needs but also more wants. If your child wants a particular item, ask them to do a little research on the net and find out various options available. They can do a trade-off between features or prices and show you their findings before making the purchase.
- By this time your child is probably taking tuitions, pursuing extracurricular activities, furthering hobbies, starting to go out with a group of friends and generally doing much more than before. All of these things will require your child to spend money on food, travel, shopping, and so forth. Make sure that whether they are spending from their pocket money or from a joint account using their debit card, they stay within a certain limit every month. As their age goes up and their expenses go up, so should their savings. This will help them begin investments.
- You have probably been investing for them in their PPF account if they have one. There might be other investments in your child's name as well, that you have made for their higher education. Educate them about these investments. The earlier they learn about the difference between equity and debt (on both risk and return fronts) the easier it will be for them to transition from being spenders and savers to being investors. Help them understand the concept of net worth. If you have a home loan, explain to them what that means in simple words.
- Help them understand the concept of the contingency fund. Tell them to assess their expenses each month and categorize them. Encourage them to save up to 3 months of expenses. With your supervision, help them to invest this into a liquid fund with you as the guardian. Reward them every so often. If they are very disciplined and achieve their savings target earlier, encourage them by giving them some spending money.
- It's never too early to learn about taxes. Start with the basics - direct tax slabs. Encourage them to also look at their purchases and expense slips when they shop or eat out. Note the difference between service tax and service charge on a restaurant bill. Help them figure out how much is a good tip to leave at what sort of restaurant. In these little ways, you will enable your child to deal with money practically and responsibly.
There might be arguments about allowance increases and expensive purchases and you might even face a situation of 'my friends all have it so I want it too'. You will want to provide the best for your child, but remember that you must also help them inculcate the best habits. With a little love and understanding and practical guidance, you and your child can have a very rewarding experience dealing with finances as a family.