Management of money is a science as well as an art and the earlier we start learning about it, the better we master it
By Sanjeev Bansal & Urvashi Varma
Money management is a skill that parents need to pass on to their young children. It must be treated as any other basic life skill since it will make them future-ready. Financial literacy begins at home. Management of money is a science as well as an art and the younger we start the better we master it.
Concept of money
To begin with, it is important to discuss with children the significance of money and how people generate income from careers and professions. At this stage, it is also important to differentiate between needs or necessities and wants or desires and how money can fulfil both.
The next skill-set is the importance of savings. Savings is excess of income over consumption. Tell them that a penny saved is a penny earned. Savings habits can be inculcated by providing them a piggy bank from an early age and as they grow old taking them to banks for their bank accounts. Introducing them to banking services like ATMs and mobile or online banking will prepare them well for their future.
Savings provide scope for investments. Money is a preserver of value, but it can grow only if it is invested well. Children must be introduced to the benefit of investments and different classes of investments like fixed deposits, post office schemes, mutual funds, gold, art, real estate shares, and bonds. At this stage, we can also talk about the benefit of investing in varied assets rather than a single asset class. Tell them not to put all eggs in one basket. Leading investors across the globe recommend that investments must start early to accumulate wealth in later stages.
Budgeting allows one to take control of one’s money. The first principle of budgeting is spending less than one earns. Teaching children how to create a plan for their money and the expenses they incur willhelp them learn about the deficit and surplus of money. This will help them decide how they wish to spend their money.
Credit for life goals
Credit or borrowings is something that most of us use for meeting our financial goals. Children must be introduced to the concept of borrowings and interest which is the charge on the borrowing. Let them know different types of loans available for personal finance like home loans, auto loans, or educational loans. It is equally important to sensitise the drawback of taking a loan that is beyond the credit capacity of an individual.
Looking into risk
Risk management is another skill-set that children must attain. To start with, they must be introduced to insurance and how procuring insurance can lead to minimising probable monetary losses that can arise due to any unforeseen adversity. Discuss with them the benefit of motor insurance or health insurance. While travelling, discuss the benefits of travel insurance and as they understand these, subtly introduce them to the benefits of life insurance.
As responsible citizens, children should understand that tax is a charge to be paid for the amenities we get as citizens and hence we need to abide by the law of land. Teaching them ethical practices from the beginning will help the government do better for the country.
Sanjeev Bansal is dean, Management Studies, Amity University. Urvashi Varma is assistant professor (Finance), Amity Business School, Noida