A seed planted early will bear a fruit in time. The same principle applies to children. As teenagers or sometimes even as young adults children often tend to behave as if money grows on trees. As parents, the earlier you create financial awareness among your children, the lesser mistakes they will make as they grow up.
The following points may be kept in mind while teaching your child about
money
Start early
Children must be taught about money from an early age. For instance, you can
give your little one a piggy bank to save some money. This will instill the idea
of saving right from childhood.
For little older kids, you can start a monthly/weekly allowance, which will
help them learn how to handle money. It is also wise to hand in notes of
different denominations (Rs 100, Rs 50, Rs 10) while giving them their pocket
money. This will further encourage them to save.
Also, easy to understand and light hearted discussions about the value of
money and how it is earned are a good way to begin with.
Rewards and Expenses
Set some monetary rewards for doing some basic chores (such as paying
electricity and telephone bills etc.) in the house. This will help them to
relate money with work. Also, encourage them to pay certain personal bills from
their monthly allowance.
For example, most teenagers use mobile phones. You must give them a budget
for the usage and let them pay for their own expenses. This indirectly will
limit their unnecessary expenses and create a sense of spending money sensibly.
Shopping with your child
It is a good idea to take your little boy/girl out when you shop for grocery
or other items required in our daily lives. Children learn from what they see.
Hence you should first plan your spending before entering a mall or supermarket.
The next step is to let the child observe the way you compare the quality,
price, warranty etc. before buying a particular product or service. This will
help them understand how you indulge in need based spending and avoid impulsive
purchases.
As a parent, it is also important for you to not buy unnecessary and
extravagant gifts for your children to meet their demands. This sets an
impression that they only have to demand every time they want something.
It is more prudent to explain them the difference between 'needs', 'wants'
and 'wishes', which will help them to make financial decisions in their future
as well.
Banking Transactions
Exhibit to your children, the concept of earning interest on savings. For
example, pay them little interest (rewarding them) on the money they have saved
out of their monthly allowances.
Teach them to calculate the interest they have earned. This will enable them
to understand the power of compounding. For grown up kids, who have already
understood this concept through knowledge imparted in schools or colleges, lead
them into opening a bank account for saving money.
This will help them save money systematically and also keep a track on their
expenses. Use every day live examples to explain concepts to your kids.
For example, if you are out for dinner at a restaurant, explain your child
how the tax is calculated on the bill amount and how a credit card works in bill
payments. Allow them to go through your personal bank statements and credit card
bills.
This shall educate them about the effect debt can have on your outflow of
money and will also make them aware about the family's financial standing.
Setting Goals
Make your children write down their short term (such as buying video games,
clothes, shoes) and long term goals (such as purchasing a bike or saving for
college education).
This will help your child prioritize and realize his/her goals. Create
awareness among them about the impact of inflation and help them calculate the
approximate future value of these objectives.
Encourage them to start saving for each of these goals separately. You see,
this will inculcate in them the habit of saving for their future and make them
more responsible. In a way, you will be shaping their vision and creating an
understanding for the need of a financial plan.
Let your child make mistakes
For some time, it is wise to let your children make mistakes while handling
their share of money and take their own financial decisions without any
interruption. This is because a lesson learnt from one's own mistakes is never
forgotten.
For example, if your child spends too much on superfluous expenses, he will
find himself incapable of purchasing something from which he could have
fulfilled his short term goal (such as buying headphones or new clothing). This
will force him to think before spending money impulsively in the future.
Having said that, you must also keep a track of his spending habits by asking
casual questions or tracking his/her bank statements or asking for an account of
the money spent by him / her. It will not be prudent to let your child make the
same mistakes repeatedly.
Involve them in your financial decisions
You should involve your children while taking financial decisions for the
family, especially the ones that will affect them. For example, when you are
planning a family holiday, then how to budget and save for the same, or when you
are creating a financial plan for investing your hard earned money for your
child's higher education or for your retirement.
You see, children learn a great deal by observing. Discussions like these
will create curiosity in their mind about money and drive them to think about
investing it.
You can consider imparting all this knowledge through various games and books
which teach kids how to handle money and related concepts in a simple and fun
manner.
While several board games (such as Monopoly, The Game of Life, etc.)
demonstrate the importance of saving and money skills; books teach kids vital
facts about money and investing it through several illustrations and pictures.
As parents, you must also keep in mind that you are your child's biggest role
models. They learn from what they see. If you have big debts, loans and unclear
financial plans, your children are bound to perceive that as normal and make the
same mistakes as you did.
Hence it is imperative that they see you saving and working towards your
financial goals in a systematic manner. In other words, you must practice what
you preach to your children.
PersonalFN is of the view that ill-use of money can be detrimental to people
of any generation. It is important to understand the value and power of money.
Educating and motivating your children to use money efficiently will make them
financially independent and help them avoid errors when they enter
adulthood.
PersonalFN is a Mumbai based
Financial Planning and Mutual Fund Research Firm.
Source: PersonalFN.com
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