A child learns how to count in school. Kids learn maths, but none of those numbers prepares them for one of the most important things in life ahead. Financial literacy can help one multiply their money, as well as make sound decisions that aid in wealth creation. However, many parents end up waiting for the child to grow up and start working, before teaching them about even the basics of finance. That ends up with many youngsters being broke and making poor spending choices. Several young adults end up wasting the initial years of their work or professional life by being rather clueless about financial decisions. However, if we teach our children about handling money in their formative years, they will be better at wealth creation.
It can seem daunting, especially with their limited understanding. You don’t want to overwhelm them either. So how do you make them financially literate? Here’s how.
Make your child “earn” extra pocket money
You shouldn’t make them do jobs for their basic pocket money because they also need to understand love and giving. But when it comes to some extra money, you can always make them earn more by helping you with a few tasks. “Children could earn money by babysitting younger children, walking dogs, washing cars, watering plants, selling old items and so on. When children earn their own money, they realise the hard work that is required to earn every rupee,” Sai Bhosale, a chartered accountant and financial advisor, explains.
Teach them about budgeting
An important reason to allow your child to have some money of their own is to help them understand budgeting. They should know how to spend money on the things they want versus what they need. You can start by leading by example when they are young. Eventually, as your child grows, they can experience budgeting first-hand. “Depending on the age, parents can give some authority to children to manage finances and take care of budgets. Budgets guide in setting financial goals and in making sound financial decisions. It enables children to understand current and future finances better and become financially savvy,” Bhosale advises.
She asserts the significance of teaching your children to differentiate between their needs and wants and plan finances accordingly. “Parents should explain to children that ‘needs’ facilitate a healthy and happy life. On the other hand, ‘wants’ are not necessities and can be reduced when your budget screams for an adjustment. Once children have understood the difference between wants and needs, a strong foundation is laid for effective financial literacy,” explains Bhosale.
Teaching your children about spending and saving
When you give your child their weekly or monthly allowances, they may make bad financial decisions initially. The thing with kids who don’t budget well is that they end up spending most of their money and end up broke towards the end of the cycle. If this habit extends to adulthood, it can lead to a highly insecure future.
“Help children in making spending decisions. For example, when you give allowances to children, make sure they manage their finances with the weekly or monthly allowances and do not fall short of money. It is important to ensure healthy habits for children by teaching them to spend on essentials on a priority basis and save the remainder for the future. Tracking their spending and analysing the spending pattern can help parents to guide their children better,” advises Bhosale. Parents can inculcate the habit of segregating the allowance based on usage. Ask them to first, keep money aside for fixed and necessary expenses. Then ask them to keep a small chunk for a certain goal such as buying a new toy or a new bat, or simply as savings. And let them spend the rest for wants.
“It is important to teach children to save and explain to them that money is not just for spending. Children must know that meeting savings goal reduces your financial stress and gives one a greater sense of security, independence and freedom,” Bhosale points out. “Provide your children with a piggy bank or savings jar to gently introduce the habit of savings. For older children, parents can open a bank account jointly with them,” she adds.
Introduce the concept of Opportunity Cost
This is a financial and life lesson, roped in one. “Opportunity cost is an economic term and in simple words means the value of what you had to give up, to choose something else. It helps to choose the best possible option among all available options. For example, let your children choose between new shoes and a new bag or between popcorn and ice cream,” Bhosale advises.
As their understanding of finances increases, teach them about investments and debt/credit
While learning to budget and save will help them be financially secure in the future, without learning to invest, they won’t be able to effectively multiply money. Once your children ace the initial levels of financial literacy, help them understand investments. Bhosale explains, “Parents can familiarise children with various investment options like stocks, units of mutual funds, fixed deposits, debentures, bonds, etc. Children should understand that savings, when invested for a long duration, can facilitate wealth creation.” You can include it as an exercise at home, wherein they give you a small amount every month for six months and at the end of the period, you return that with interest.
Eventually, you can help your children understand debt/credit so they know that loans aren’t free money. It all comes with a cost. “Teaching children that every credit taken comes with a cost in the form of interest and one must exercise the option of availing credit facilities only when it is necessary,” Bhosale advises. You can also teach them about EMIs by converting the amount they borrowed from you into instalments.
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