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Teaching children about money needs to start early; kids and money need not be kept apart if taught in an age-appropriate manner.
By Poornima Kavlekar
Kids are like sponges – they absorb things real fast. And they are living in an era of information overload. When my daughter was three, she believed that everything we bought cost Rs 10. Why? Because it was the biggest number she knew! Gradually, it stopped being Rs. 10 and she would ask, “How much did it cost, amma?”
This, I realised, was because she was getting familiar with numbers and could also read the MRP printed on the products we bought. So she knew it was not always Rs. 10. And when she learnt to actually understand the value of money, it was a proud moment. Recently, she explained to her younger brother, “You want a toy bike. Why not buy the white one that costs Rs. 225 instead of the yellow one costing Rs. 250?” And my son bought that argument!
You may ask, is all this really important? It is. Children today are bombarded by messages from marketers and much attracted by the innumerable products on the shelf. Bearing in mind that children indulge only in spending, without the responsibility of earning till the age of at least 18, teaching them money management is an urgent priority. To wait until they start earning independently is a little late in the day. After all, like cycling, a child cannot learn to balance from day one.
Here are a few pointers that will help parents teach their kids money management.
“The first step is to teach them about the purchasing power of money,” feels Manish Jain, certified financial planner, Knowledge Partners, a financial planning services company. There is a cost to everything and your child needs to understand it.
At the age of 3 or 4, your child can be introduced to a piggy bank. Since knowledge of addition is too early here, they should be taught to understand that if they take money out of the piggy bank, then there is a drop in the number, while if they add, there is a rise. Using a transparent piggy bank for this may be of help. At this stage, all you are doing is acquainting them with the basic concept of money itself.
Allow children to handle money. Take them to the next stage when their arithmetic skills improve. There are parents who do not believe in pocket money. While it’s a personal choice, what you could do is to make sure that your child, as he turns 7 or 8 (whenever he is comfortable with numbers and is able to add and subtract), is allowed to make purchases and pay for them. This will make them understand the value of money, and hopefully teach them to prioritise between their wants and needs.
Chennai-based Hamsini Sivaramakrishnan, 12, does not get regular pocket money from her parents. But, her mother Harini allows her to purchase whatever she wants with the cash gifts she gets for her birthday or Diwali. “This gives her a feeling of responsibility for what she has purchased and she also understands the true worth of what she has bought,” says Harini.
The concept of worth. When confronted with an expensive purchase, telling your kids that “we can’t afford it” may not be a good message since it can induce feelings of anxiety. “Instead, tell the child that the toy is too expensive and not worth the kind of money they are charging for it.” suggests Manish. Pointing out other (essential) things that they need and could be purchased with the money is a way to get them to understand the concept of worth.
The basics of banking. When your child turns 8, expose them to the basics of banking. Manish suggests, “Open a bank account for the child and take him/her to the bank and the ATM counter. The child may not understand anything initially but will slowly ask you questions to figure out why we go to the bank and what happens there.”
Talk to them about deposits and interest and that they can actually use the interest and keep the principal untouched to buy themselves anything they want later. To start off, you could deposit the gift money they receive on various occasions in their account and initiate the investment habit once a reasonable amount is reached. This would also be a good time to teach them to relate income with expenditure.
Understanding investment. When the child is a little older, say 12 to 14 years of age, you could expose them to other asset classes. It is not that hard. Judge your child’s understanding capacity and make it a gradual exposure. Make sure they are around when you decide to buy a mutual fund or are buying a stock. Jain suggests, “Explain these things to children when they reach class 8 – 9. The importance of spreading one’s risk over various asset classes should be explained in simple terms, with the help of examples.”
This is something that Hamsini understands. While her knowledge of the stock market is only theoretical currently, says mother, Harini, she is surely prepared to invest when the timing is right. To understand the nuances of the financial market, the mother and daughter duo make it a point to watch the CNBC business channel together. Harini says, “Hamsini now understands the movement of the stock market index and the ups and downs of the stocks.” Her father, Sivaramakrishnan, also plays a major role in explaining these nuances. Clearly, the role of the parent here is very important.
You could argue that there is no need for your children to learn about investments so early in life; but the fact remains that all of us are living in complex economies today. There are many financial products available. Understanding their basics at a very early stage will help kids to take advantage of the compounding effect that the investment will offer.
There is no one right way to teach your child money habits, but, starting early is a smart move. Never make money matters “adult stuff.” Gradually acquainting your child with money matters will ensure that they neither fear money, nor disdain it, but know how to use it wisely.
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good article poornima. wish my parents had done this to us earlier in our lives. its a pretty interesting article and good insights too. keep up the good work.
Very good article Poornima. Liked the flow of thoughts and clarity in thinking.I think you hit the nail on the head when you wrote “There is no one right way to teach your child money habits, but, starting early is a smart move. “…Keep them coming….
A good article Poornima. You have covered all age groups and the stages of learning are lucidly explained.
Hey, that was a timely and sensible article…
Hi Poornima, Good article. I too agree it is better to talk about the worth or usefulness of an expensive item, instead of saying it is too expensive to buy. We also do budget shopping, wherein we tell the kids that they are allowed to buy 1 article within a certain amount. It makes them think about what they really want. And of course the idea of exposing kids early to the concept of saving is good.
Poornima, well articulated piece…yes it is important to teach kids the value of money and give them exposure to banks at an early age in these days of over exposure and extreme peer pressure ..
Very clear, simple and easy to read. ‘To wait until they start earning independently is a little late in the day. After all, like cycling, a child cannot learn to balance from day one’…is so true. Look forward to reading a few on the retirement challeges as well. Great going Poornima!!!
Very clear, simple and easy to read.’To wait until they start earning independently is a little late in the day. After all, like cycling, a child cannot learn to balance from day one’ is so true…Look forward to reading more. Congratulations!!!
Excellent article. And its important that your points are so nuanced. Its a fine balance between understanding the value of money, and turning extremely materialistic on the other hand. Nowadays we see typical double income, IT couples who seem to indulge in every whim of their child. Mostly because they are enjoying the sensation of just being able to do the best for their children. But the side effect is that some children completely miss the reality that things have proportional value, and you need to work to earn certain things in life.
Introducing them early to a balanced view of value and earning is simply practical and useful. To my mind it ranks up there, with all the “reality of life – how to be prepared” discussions. Great to see you articulate it so well.
Worth reading and very good article poornima. The article was not only about how to save but also about how to spend. Its good to teach children about investments at an early age.Good work.
Very well written. Loved the flow of thought. It is simple and easy to understand. Not making money matters ‘adult stuff’ is told very nicely throughout the article.
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