To prepare their children for a better financial future, in addition to financial planning, parents must focus on imparting good money habits to children.
By Arun Thukral
Parenthood is like a roller coaster. Sometimes you close your eyes in sheer terror & other times you just raise your hand up, high in the air and enjoy the ride. From the word go, when you hold your newborn for the first time in your hands, all your life decisions tend to get focused keeping the little one in mind. Building a financially secure future assumes top priority, impacting the way we view, spend, save and invest our finances. However, what parents do not realize is that this struggle to secure the child’s future is pointless if the child is not taught how to manage these finances.
Importance of financial education in the formative years
It is said that at the age of three, a child starts understanding the concept of saving and spending. Early experiences with financial decision making act as foundational skills and go a long way in shaping an individual’s preference, attitude and behavior. In fact, by the time the child reaches the age of seven, their money habits are typically set. By not introducing key money concepts to children in this phase, make it challenging for them to handle finances efficiently as adults.
While the school education focuses on familiarizing children with a wide range of topics, money and finances are still not given the due importance. In such a scenario, the only source children can turn to for gaining financial insights is their parents.
Parents must remember that they will not be around forever. To prepare their children for a better financial future, in addition to financial planning, parents must focus on imparting good money habits to children.
Best way to teach good money habits
Children tend to learn the most by observing the behavior of their parents. They soak information like a sponge. Hence, the best way to teach them any good habit is by practising it in the first place.
While practising what you preach is a highly recommended strategy, to substantiate these lessons, below are a few activities that parents can practice to make the financial learning process fun for their kid.
Instead of just handing over the money, make your kids work for it. Mutually decide a list of chores for the child to perform during the month. Pay the agreed sum of money if they complete all tasks successfully.
Lesson: There are no free lunches.
Plan a party
Work with your children to plan a birthday party. You can start by setting a budget for the party. Next, prepare a checklist in consultation with your child. Discuss the theme, games, return-gifts, snacks, cakes, and guest list. Ensure that all the expenses fit within the budget. If your child wants to invite more friends, show how it will impact the budget. This exercise will teach them the value of money. Showing them that a given sum of money can get them a specific quantity of good and services will help them to understand that everything has a cost and it is up to them how they derive the most value from what they have.
Lesson: Make the most of your limited resources with careful planning.
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Take your kids to a supermarket and show them how you shop for groceries. Teach them how to read the labels, compare prices of available options, and pick the one that fits the budget. As a follow-up task, give your kids a simple grocery list and a fixed amount of money to buy all the items on the list. This chore will train them to exercise caution and gather information before making a purchase. As an adult, children will find this experience useful in avoiding poor purchase decisions.
Lesson: Be careful and do some research before making a purchase.
Build a fund
Instead of giving in to all the demands of your children, encourage them to save a portion of their pocket money towards their material goals, such as a picnic or a new toy. You can incentivize them by promising to foot a certain percentage of the bill. Once they accumulate their targeted sum, reward them by helping to fulfill their goals.
Lesson: Saving is the first step to achieve financial goals.
Get more through regular savings
Introduce the concept of interest to your children by offering them a certain bonus amount, say, on every Rs 1000 that they save from their pocket money. This bonus could be in terms of percentage, say 10%. While for the first Rs 1000 saved, they would get Rs 100, when they touch the Rs2000 mark they will get a return of Rs 210 (10% of Rs 2100).
Show them how the calculations work every time you top up their savings with the interest amount. Explain the difference between amounts accumulated with and without interest.
Lesson: Interest works in your favour.
It is crucial to teach children the importance of giving to ensure that they grow up as more conscious citizens. Encourage them to donate their toys, books, or clothes to NGOs. To overcome the initial resistance to this idea, follow up every trip to the NGO with ice cream or a pizza party. Over time, as they mature in their thought process, this association of happiness after doing a good deed would shift from material gains to a feeling of satisfaction.
Lesson: Sharing is rewarding.
All parents strive to ensure that their children inherit a prosperous financial future. However, the children may not truly appreciate this luxury, if you do not teach them the value of money. So, start grooming your child today with these fun and engaging activities.
( The author is MD & CEO, Axis Securities)