There is a famous saying “A penny saved is a penny earned”. This shows that merely earning money does not make one rich. Saving also forms an essential part of earning wealth. Wouldn’t it be wise to teach one’s children about money and the art of saving and investing at a young age . Remember any work well begun is half done. The same holds true with finances. If one’s child learns how to handle money at a young age it would stand him in good stead in his older years and he would not be overawed by any financial situation.
When should one start teaching his children how to handle money?
- The moment one’s child starts to figure out that money buys things, that is the time one needs to start teaching him the value of money.
- One’s child sees money being withdrawn from a bank or an ATM. If one indulges all ones child’s needs and desires the child figures that you’re a money tree. Remember one’s child should not get this impression and needs to learn that it takes hard work (blood and sweat) to earn money. Only then can one’s child understand the value of money.
- The next question is should one deny one’s child chocolates and toys saying “I am poor and I cannot afford the latest remote controlled plane you are asking. Then one picks up a costly designer suit or the latest smartphone for oneself and the child figures that if you can indulge your needs (purchase whatever you want) then you must indulge their needs (chocolates and toys).
Teach money the easy way
- One of the most important things to do while teaching finance to one’s child is to keep it simple. Avoid jargon and too many technical terms which would confuse ones child.
- One needs to teach one’s child about finance through a simple game such as monopoly. This teaches one’s child not only about saving and investment but also on how to run a business.
- After one’s child reaches the age of 8-10 years the knowledge he would have gained through these games needs to be put to practical use. This is the time to introduce him to magazines and simple books on finance.
- One’s child soon learns to read and the desire for financial knowledge grows within him. Curiosity takes over and he reaches for more and more financial books himself.
- One also needs to set a good example by not spending lavishly and wasting money in front of one’s child. Children learn by seeing rather than by what you say.
The hands-on approach
- One of the best methods to teach one's child about money is the practical or the hands-on approach and there is no better method than this.
- One needs to teach his child how to open a piggy bank. One’s child might want a toy and this is the right time to teach him about saving. The child needs to be told the value of the toy he wants say INR 100.
- One needs to pitch in half the amount say INR 50 and the remaining amount is put in by the child in the piggy bank.The child earns money by doing the household chores and assisting the neighbors with their work This money is put into the piggy bank. Once it reaches the prize sum of INR 100 the toy is purchased.
- One can teach his child about budgeting through the purchase of the family groceries. One’s child is given a fixed sum of money each week and told to plan the purchase of the fruits and vegetables used by the family.
- One’s child learns the art of bargaining and negotiation through these purchases. Initially, one’s child would be fooled by the shopkeepers but would soon learn what each item costs as well as their quality. One’s child would soon learn how to manage his costs within the budgeted amounts.
The opportunity cost of capital
- One knows that money is a limited resource and needs to be spent wisely. One’s child needs to be taught the art of financial decision making and the need to inculcate discipline in a purchase.
- Since money is always in short supply one’s child needs to choose between the purchase of a toy or a new shirt. He cannot have it both ways.
- This teaches financial decision making and inculcates a sense of financial discipline in one’s child as he realizes the need to choose the best option (shirt or a toy) from the best available resource (money which is in short supply)
The value of money
- One’s child needs to be taught about the productivity of an asset. Truly money begets money and productive assets head the list.
- One needs to teach his child about real estate and the need to invest in an apartment or a house as a roof over one’s head is a priority.
- One needs to teach his child about the benefits of investing in a second house as it can be rented and its value or the cost spent on it recovered over a period of time.
Inflation the killer of purchasing power
- One’s child needs to understand inflation and the time value of money. Money loses its purchasing power (ability to buy things) with the passage of time. This is due to inflation.
- Inflation is the general rise in prices of all goods and services in society with time. Think onions, vegetables, fruits and all other goods and services.
- One’s child needs to realize that he cannot hesitate and postpone his purchasing decisions indefinitely as the purchase of a toy or a shirt if put off for too long leads to a rise in the price of the item.
- Inflation also needs to be factored in the grocery budget and one’s child’s pocket money as inflation eats up into these amounts and soon the child realizes that his money is insufficient to make all the purchases and the shortfall needs to be made up.
The need for imparting financial education in schools
- One of the most important subjects that need to be taught to children in schools especially at the primary level is financial education.
- One's child needs to be taught that merely earning money is not enough but savings it is also necessary.
- Financial discipline and the savings habit needs to be taught at a young age and which better place than ones child’s school.
- Sadly the Indian system of education neglects this subject and the results are there for all to see. Wasting of money, gambling and falling into debt are the effects of not inculcating financial discipline and the saving habit in one's child at an early age.
There is a famous saying “If you would be wealthy, think of saving as well as getting”. This saying needs to be taught to one's child as early in life as possible before he comes under the influence of his peers and friends and starts splurging on credit cards and falling in debt. Surely an investment in financial knowledge is the only way out of this mess.