Teaching Your Child Money Management
Do you often tell your child, “You need to know the value of money?” Well, that becomes easier if you try to raise a money-smart child.
By Aruna Raghuram
The number one problem in today’s generation and economy is the lack of financial literacy - Alan Greenspan, American economist
Anupama Menon is busy shopping at a departmental store. While she browses through the books section, her five-year-old son, Rahul sneaks into the toys and games area. He is excited to see several new toys. He quickly picks up an armful of toys and rushes to his mother. Anupama tells him he must choose two out of the eight he has picked. She explains to him that they cannot afford to buy so many toys. “But Mama, you can always go to the ATM and get more money,” asserts Rahul with a disappointed look.
While most of us grew up hearing the phrase, ‘Money does not grow on trees’, the children of today believe money flows in ATMs and that there is an endless supply available. That endless supply is the problem and also the, first reason for you to teach money sense to your child. Yes, it is true that money does not make the world go around (And, no child should be taught otherwise). However, it is essential to teach money basics to children to empower and equip them with the knowledge, skills and confidence to build a secure future for themselves.
According to Holly Reid, author of Teach Your Child to Fish: Five Money Habits Every Child Should Master, no one is born knowing how to fish. They have to be taught. Similarly, your child must be taught the rules and tools of money management. The five money habits Holly focuses on in her book are: spending wisely, saving, using credit responsibly, giving generously and being rewarded for hard work.
The right age
You can introduce money concepts to your child as soon as she begins to count (by age four or five). According to a 2013 study authored by behavioural scientists from Cambridge University, titled 'Habit Formation and Learning in Young Children', adult money habits are set by the age of seven. Yes, it is that early and therefore, it is never too young to start teaching smart money habits to children. Here’s how to go about it:
What parents can do
Give pocket money/allowance: Have your child use a notebook to keep track of where the money goes each month. This would be like maintaining an ‘accounts register’ which records income, expenditure and savings on a regular basis. This will help your child to be aware of his spending habits and help him manage expenses better.
Father-daughter duo Gordon Pape and Deborah Kerbel who jointly wrote the book Money Savvy Kids: The Best Ways to Teach Your Children about Money for a Strong Financial Future, recommend introducing kids to budgets from age nine as a way to track money and also, to encourage savings. Open a bank account for your child once he is ten years old.
Delay fulfilling their requests: Encourage your child to make a wish list. When she reviews the list a few days later, she may realise she doesn’t want some items anymore. Also, children learn to appreciate things when they have to wait for them. Teaching your child the concept of delayed gratification can help her combat the ‘Buy now, pay later’ mentality that can lead to credit card debt.
Let kids own up to their decisions: Ron Lieber, author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money said, “Once you set a budget, it’s important to let your kids make their own financial choices — even if the way they’re choosing to spend their money doesn’t match your preferences.”
His rationale — better they get it all wrong and learn from their mistakes when they’re still under your watch.
Be good role models: Never underestimate the effect your own money habits (good and bad) have on your child. Be honest about the bad financial decisions you have made, so that your child does not make the same mistakes. Avoid shopping as a leisure-time activity.
Focus on the relationship between work and money: Emphasise that you don’t get anything for free and you have to work for money. Valuing hard work will curb any sense of entitlement your child may have and make him respectful of money.
Don’t pay for chores: It is better not to tie chores, doing homework on time, keeping the room tidy and any other good behaviour, to money. This will rob your child of the satisfaction of achieving something from self-motivation. Also, never buy gifts for your child because you feel guilty that you are not giving her enough time.
To understand the concept better, we spoke to a financial expert, K. Satish, Director, Zen Money, Hyderabad:
Why should parents teach children about money?
Knowing about money and how to manage it is one of the most important life skills. Also, inculcating the saving habit in children from an early age will reduce the risk of debt-related problems later in life.
What are some of the money-related concepts children should understand?
- Saving: This involves spending less money than what you have and setting that money aside for future use. Typically, all the short-term and urgent fund requirements are met from savings which are deposited in banks, where the risk is low.
- Power of compounding: Children should be made aware that money grows by investing their savings in various avenues such as fixed deposits in banks, mutual funds, bonds, stocks and real estate to earn an attractive rate of return. Here, the power of compounding works for you. On the other hand, if you take a loan, you have to pay interest. Here, the power of compounding works against you.
- Achieving a financial goal: Parents should involve preteens in planning for their college education. This will equip them to achieve financial goals that come later in life, like buying a house or making provisions for retirement.
- Difference between an appreciating and depreciating asset: While gadgets and vehicles depreciate in value over time, money in the bank appreciates. Teach your child about inflation and its effect on the economy. Let your child understand real estate, interest, earning, investments, etc.
- Money can’t buy everything: Children should be made aware that there are things such as love, relationships, health and joy that money can’t buy.
What are the other skills children acquire when they learn about money?
Knowing the difference between needs and wants: While a need may have to be fulfilled immediately, a child can wait to satisfy wants. Understanding this will help your child make appropriate money choices. Focusing on needs rather than wants also makes your child a happier person.
Delaying gratification: In the famous Marshmallow Test, a marshmallow is put before a child and she is told that she can have a second one if she can go 15 minutes without eating the first one. Passing the test is considered a promising signal of future success in life.
Discipline: Having discipline helps in achieving any goal in a structured way.
Finally, to ensure that children develop a healthy relationship with money, parents must help them realise that money is only a tool to help them achieve personal goals, and not the end goal itself.
Aruna Raghuram is a Bengaluru-based freelance writer.
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