Money doesn’t grow on trees. It’s a famous saying. Children need to understand the value of money to inculcate the habit of saving at a young age. Money management is best started young. Children are not taught the importance of saving in schools and are left to fend for themselves as adults. The financial loss to families and society at large is immeasurable. These tips should go a long way in teaching children to save early.
Teach how to earn & spend: Get the children do chores at home or the neighbour’s house and earn money. This is killing two birds with one stone – children learn the value of money as well as work. Banks have the facility to open savings bank accounts for children below 10 years. Open a savings bank account in child’s name and deposit money earned or received as gifts. If the child needs something urgently, use the money for the purchase.
A savings bank account plays the dual role of saving money and teaching the concept of interest. The child learns simple interest and compound interest, which is interest on interest. The child learns that deposits made in a savings bank account earn interest. Money deposited in fixed deposits earns compound interest. As the child grows a transition is made from savings bank accounts to fixed deposits. The child learns saving and more saving through compound interest.
Teach children make a budget: A budget is a simple way of saving by accounting for every rupee earned and spent. A budget teaches decision making, which is at the heart of financial education. The child must be made to understand the situation and make a decision either to spend immediately or save money for a rainy day. The child must know how to choose between a need and a want. A practical example could be taking the child to a supermarket where he has to choose between an expensive chocolate and bread for breakfast. The child learns to decide between a need and an indulgence. This is the essence of a budget, which teaches decision-making at a young age.
Art of saving & mistakes: The child might get greedy and spend all the money saved on an indulgence. The process of saving starts all over again and the child learns the difficulties of saving. This is just like adults breaking fixed deposits and learning the difficulties of building one again. The art of saving learnt in childhood stays for lifetime.
A dilemma for parents is when to teach the child the art of saving. Studies have shown the impact of a financial lesson wearing off in months. The best time to teach children save money is just before a birthday. An important milestone plays on the child’s mind and lessons learnt could stay lifetime. Teach the child the art of a budget just before handing gift money. This exerts pressure on the child to curb spending and start saving to reach important goals.
Learning through imitation: Children learn a lot by imitating parents, so be careful on what signals are you sending. The best way to teach a child the art of saving is to save money. Make it a point not to buy expensive items, without giving a proper thought, in front of children. If children see parents wasting money, they figure there’s enough to indulge their wants. Go slow on heavy shopping in front of children. It sets a bad example at odds with the saving lessons. Why saving: Have a conversation with children on money and the importance of saving. A naïve question like ‘are we rich’ can be used to emphasise the need for saving and responsible spending.
Carrot & stick approach: Praise the child on every rupee saved. Throw in a low-cost treat to encourage the habit of saving. If the child demands money to buy something he can’t pay for, don’t step in and make the purchase. This inculcates in the child the sense of deprivation that comes from spending all money on frivolous purchases, without saving for things they really want. Tough love forces the child to save money, which is in his/her best interests.
Teach to save early: Studies have shown that by the age of seven years core behaviour of children gets formed. Children understand the benefits of saving and recognise the value of money at a young age. They also recognise that waiting benefited them in the long run and some decisions are irreversible and may have to be delayed until a later time. Simply giving children money doesn’t teach saving habits. They need guidance on saving and budgeting. Children who learn the habit of saving reap the rewards later in life. It’s the duty of parents to give them a leg up.
Be wise, get rich.
(The author is founder and chief executive officer of IndianMoney.com)