The best way to inculcate a saving habit in your child is to start at a very young age. This will give life-long benefits. Most grown-ups, who are not prudent in handling their personal finances, are those who have not had much exposure to this topic when they were young.
Open and Honest Communication
Right communication is imperative to starts anything. Most parents do not discuss money matters with their children. Lack of time or lack of awareness could be possible reasons.
But in most of the cases, parents do not want to burden their children with financial issues. As a result, children often grow up without any understanding of the importance of financial management.
However, one should remember that avoiding such issues are detrimental to the children's interests. Moreover, it is important that both husband and wife represent the same financial values so that the child is not confused.
Lead by Example
Young children are very impressionable and pick up a lot of their early habits from their parents. If you are not careful about how you save and spend, they will do the same as they grow up.
The best way to avoid any confusion on this is to lead by example, even if you need to consult a financial advisor or read books on personal finance to achieve this.
Five Pillars of Financial Success
Teaching children about money helps them respect and value it and builds a strong foundation for them to earn, save, spend, borrow and share responsibly as they grow up. Let us look at each issue and how we can help our children with it:
Learning to Earn
Children look at their parents as ATMs (All-Time Money, as opposed to Automated Teller Machines). And the existence of ATMs (Any-Time Money) have not exactly helped. So it is important to let the children know that parents are there to take care of their needs, they too have to earn a living and manage their expenses.
The easiest way to do this is by fixing an allowance for your children after discussing their needs and expenses. If they are smaller, you can just hand them a weekly allowance to go out and spend with you. In fact, may be you could create the 'limited expenditure atmosphere' by announcing a budget for yourself for the week and living within it.
Saving for More
The habit of saving can be encouraged from a very young age. Invest in a piggy bank for your child and give them a coin every day to save in it. Children tend to value coins more than currency notes.
As they grow older, help them differentiate between notes and coins of different denominations. Teach them delayed gratification by urging them to save for that toy or pet they want.
You can paste a photograph of the desired object on a glass container and convert it into a piggy bank. Once it is full, empty it and go with your child to purchase that toy. I am sure they will take best care of that toy among all the others possession.
With older children, you can open a child savings account for them in your bank. Most banks provide this facility with various benefits and safeguards.
You can encourage older children to save their allowance by giving them an amount that covers agreed expenses plus some money for savings. They may tend to spend that too, but only through your guidance and patient handling, will they come around to save the agreed amount.
Spending Wisely
The basics of economics starts with 'Desire versus Demand''. Similarly children need to be taught the value of money by making them understand that wants can be unlimited but the resources are not. Thus expenses have to be budgeted by first taking care of needs and then, other wants.
To achieve this, you should involve them in the monthly family budget planning. For starters, make a list of expenses that are 'Must Buys'. Thereafter, discuss what wants you can afford to fulfil, whether it is a new gadget for dad, accessories for mom, toys for the kids or a holiday for the family.
The family budget should also include the children's allowance for daily expenses.It will make them feel important, responsible and help them spend within their allowance.
You should also take children shopping for the family with the shopping list and budgeted amount. Teach them to compare prices and as they grow up, include quality judgement along the lines of utility over different products.
This will help them make informed and responsible purchases and help overcome impulsive buying and counter the effects of advertising and peer pressure on their spending habits.
Waste not, Borrow not
Surviving the week or month on their allowance should be made a priority for your children. While they could overshoot their allowance initially, they should learn that there is a price to pay for it. You should charge interest, albeit marginally, from them for overdrafts and make them pay back the loan as soon as possible.
LOVE FOR MONEY
However, to save them from undue stress if the amount grows too large for them to repay, you may consider an upward review of their allowance or some other means which they can use to repay the loan. This habit, though seemingly harsh, will help them stay out of debt traps when they grow up.
Caring and Sharing
Children should be encouraged to share some of their money as gifts for family and friends, without overdoing it.
To sum up, make learning about money a fun thing for the children and teach them in way they can understand. Giving such a foundation to children from an early age will help them grow up financially smart and responsible people, who will be an asset to their families and the society. As Benjamin Franklin once said, "An investment in knowledge always pays the best interest."
The writer is a Kolkata-based financial planner and can be contacted at rishi@touchstonewealth.com.
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