What you should teach your kid about money and at what age

Updated: Feb 4 2014, 20:31pm hrs
Kids and moneyBefore beginning the journey of financial education for your kids, you need to make sure that you are patient with them. (Thinkstock)
It is difficult to understand child psychology so you need to take extra care when you are raising the topic of financial information with your kids. Kids need everything in todays world, from the latest gadgets to toys, stationery and clothing. Todays kids have become inquisitive and demanding so it is crucial that you start educating them about finance from a very early age. They should understand that considerable efforts and time go into earning money and that money does not simply come from your wallet or from the bank.

Before beginning the journey of financial education for your kids, you need to make sure that you are patient with them. As their financial acumen is miniscule when compared to your level of understanding, dont expect them to become financial experts in just one day. Set practical examples for them which will make them easily get the concepts and value your financial decisions. In the end, you need to teach your kids to understand the value of money; so modify your behaviour so that they can learn from you.

Here are some things you can teach your kids in different stages of their childhood:

Ages 5-8: Teach them where the mother or father gets the money from and what the source of income in the family is. The first lesson would be to show your kids different notes and coins that tell them that everything like goods and services need to be purchased with the help of money. So the items that you recently got like the new clothes, new lunch box or the new toys have a cost which is paid by using this money. Once you introduce the concept of what money is, you should educate them on where the money comes from. Make them understand that hard work and time is what gives you money and not the ATM. It is not very easy to make kids understand at this age. Hence, teach them with practical examples that when you go to office, you earn money because of your hard work and this money is kept in the bank for safekeeping. As and when money is needed, it can be withdrawn from the ATM. Let them know that money is really important, and only if you are willing to work hard will you get money.

Ages 8-10: In this age, the kids are a bit more mature. They understand that money is valuable and should be used carefully to get essential things. Teach your kids how to save and estimate the value of things. The first lesson would be to give your kid a certain amount of money every month similar to pocket money. If your kid demands a new toy, ask them to save the pocket money for a few months and only then will he or she get the toy. This way your child will learn to save and understand that everything cannot be bought by thinking impulsively. Every financial decision needs to be planned and then taken into account. You can also give examples from real life or some stories that the kid understands. Explain to them the differences between investments and savings. A kid should also understand the difference between necessary expenditures and luxury expenditures. For example, purchase of groceries every month is a routine expenditure and is a necessity as you need food to eat. However, going on a vacation is luxury expenditure as it is not critical for living. Such real life examples make your kid understand such complex concepts better.

Ages 10-13: This age band is when the kid is entering his teens and is keen on learning new things and experimenting every day. You should now introduce him to the basic ideas of debt and investments. Explain what a savings account is, why the account earns interest and how investments are brought about. Explain the ways these accounts can be used for future goals or how saving is essential to support the family in times of crisis. Dont expect the kid to get every tiny detail of how to run these accounts, but the basic idea should be understood. You can also try to begin the education of compulsory payments to be made every month. For example lend them some money for their basic needs every month and deduct a certain sum of money as maintenance costs, which can be tantamount to EMI payments. Also, explain the difference between savings and debt. You dont need to expect them to understand the exact workings of credit cards or loans. However, the simple idea that when you pay by credit card today, you should repay this tomorrow should be understood by them. Tell them that exceeding limits on a credit card or not paying your bills and loans on time can lead to serious repercussions in a long run. Do not make the concepts too heavy and gradually educate them using real life examples.

Showing financial discipline yourself, being patient and educating yourself are important requisites before you educate your kids. Keep reminding them these tips as and when you can so that they realize that you are seriously interested in educating them about money.