Lets look at some ways in which we can encourage our children to understand the concept of budgeting, saving, and investing.
Inculcate habit of saving
Most of us have maintained a piggy bank in our childhood. This is the most primary, but effective, way of teaching a kid the importance of saving money. I remember how on certain occasions when my elders would give me cash gifts, my mother would keep them in a box. Then, at the end of every year, she would show me all the money that I had saved. Then, we would sit and discuss how and where we would spend that money. So, the first thing to do is to get your child a piggy bank.
Ask your child to put a part of his allowance in that piggy bank regularly. This will inculcate the habit of saving in him as he will see the money grow in the piggy bank with every rupee he adds. Taking my own example, my niece too has a piggy bank and to ensure that she saves more, my sister has offered this idea to her that for every penny she puts into the piggy bank, my sister would add one too. This way, my niece now prefers to save more. Also, talk to your kid about the benefits of saving money and how each penny saved today can grow into a rupee tomorrow.
Involve your kid while discussing finances
It wont be a bad idea to involve kids while chalking out familys monthly finances. It could indeed be an effective tool to help them understand the importance of money and planning before spending. Most often than not, kids learn about money management and develop their spending habit from parents. Hence, an open discussion with regards to tackling monthly expenses would help them understand the prudent way of spending money. You could, in fact, sit down with your child and discuss the ways in which he could spend his pocket money. This will not only help him understand that he should plan his spending, but also ensure he doesnt make unreasonable demands. This exercise will surely help in a long way and assure that your childs first paycheck doesnt burn a hole in his pocket.
Teach him about value buying
We discussed about teaching kids how to spend money judiciously. This relates to an important aspect of spending, which is value buying. While teaching your kid about money, you should discuss his spending choices. You must discuss where and on what he should be spending money. You should introduce to him the idea of buying things that are necessary rather than spending all his pocket money on something that is not required. This could be well explained to your kid if you give him choices while buying things for him. For instance, if your kid demands a toy and a book, dont easily give in to both his demands. Tell him that with his pocket money, or rather with your budget, he can buy only one of the two. At the same time, help him with his decision to select the best option.
We all have budgets for managing our household and make every possible effort not to cross that. The same concept should be explained to the kids. I remember it wasnt too difficult for me to manage an entire month on the meagre pocket money simply because I had a budget set for myself and would never go beyond that. I knew I had limited money to spend and would not get more. Further, any additional allowance was hard to come by. Its the same rule and principle that you have to pass on to your kids. That way you will be able to discipline their spending habits and in a way make them learn about money management.
Talk about investing
Finally, savings should eventually lead to investing. As the kids grow, you should introduce them to the concept of investing their savings and highlight the idea of how the money could grow through investments. The first step in this direction would be to encourage them to open a savings account and help them see and track their money grow. The money saved and the interest earned on it could come in handy in the long run to meet their financial requirements.
MorningstarIndia research team