Parents are the first teachers of their kids. Be it social skills or life skills, parents give the first lessons to their kids. They support when the children falter, encourage when the morale is down, and cheer them when they succeed.
Parents try to ‘shield’ their children from the harshness of life. But it does not prepare them for the realities. In fact, when kids have no one to turn to they end up making wrong decisions in the absence of a framework.
One of the most essential lessons in life that every parent must give to their children is skillfully managing money. You can turn these lessons on Money Management for Kids into engaging activities. Use their daily routine to serve as a framework to introduce the children to money matters suited to their age.
It is also important to teach the right lessons on money management for kids at the right age.
Staring early, you can put them on the right path. Otherwise, children will acquire something or the other from their environment. It is imperative that these impressions are the right ones.
So, what is the right age to start?
Well, the financial journey of each child would be unique. But the following thumb rules can help you pinpoint the right time to start talking about money with them:
- When they start using coins to buy candies.
- When they argue and say “mom, it’s only 10 rupees for the balloon.”
- When they are old enough to convince you how getting them a dress or a toy would mean the world to them.
Here are some age-appropriate money management tips for kids.
Money Management for Kids: Ages 3-8
Money is Limited
For kids this age, just as the milk comes from the milkman in cartons or bottles, the money comes from your purse or the ATM. The machine popping out notes just amuses them. Therefore, the first lesson at this stage is to make them realize that money is finite – just like their TV time or candies.
Needs Over Wants
When you teach your kids how everything has a time – sleeping, TV, playing, eating, and studying – you are essentially telling them to prioritize. Similarly, you can negotiate with them about having a chocolate shake or an ice cream or having their favorite toy or the Happy Meal, but not both. To help them decide, you can also tell them the benefits of each – and nudge your little one to make healthy food choices in the process.
Waiting is Rewarding
One of the most essential life & money management lessons you can teach your kids is that not everything is available at their beck and call. For most of the good things, one must learn to wait. Learning early to avoid instant gratification in the age of 2-minute noodles is one of the biggest virtues. You can tell your kids that if they wait till their birthday, then they will get a fancier dress or a bigger bicycle.
Sharing is Fulfilling
Take your kids to places where they can learn to share their toys, books, clothes, and other things with the unprivileged. A life-long lesson of sharing and giving can be is fun as well as rewarding. Show them that helping others does not require too much money, but simply a good heart. Ask them to create a separate ‘giving’ jar to set aside a part of their savings to help others.
Money Management for Kids: Ages 9-12
Planning and Tracking
You can teach an important lesson on money management for kids of this age is to plan their week and prepare a budget. Make them independent by allowing them to go to the corner store for buying household stuff. Let them apply their math skills to currency notes and shopping bills. Ask them to write the expenses in your household expenditure diary or app. Show them how this helps you track your expenses, and it leads to smart spending. (Also read: How Budgeting helps in making you aware of your expenses?)
Many things that they covet are out of budget, so they should make a wish list. Help your kids in preparing a wish list with reasons for each item on it. This will help your kids set financial goals and prioritize their expenditures. It also gives them a sense of accomplishment when they earn/save enough to buy something on the list.
Habit of Saving
Give your child some autonomy with an allowance. But it must accompany some responsibility too. For example, ask your child to save enough from their weekly allowance if they wish to buy an expensive toy or gadget. Get them gullaks (piggy banks) for the safekeeping of their savings. Or they can keep the money with their bankers, you, and maintain a passbook.
Give your kids a positive incentive to learn doing and help you in household work – cleaning, doing dishes, laundry, and gardening. When they get compensated for their efforts, the zeal to learn and earn will push them to do better and more. This way they could reach their goals much faster than by simply saving. This also helps you by way of load sharing and involving your kids in daily activities.
Money Management for Kids: Ages 13-19
By this age, kids have a better grip on reality, and it is the right time to involve them in financial decision-making. You can start small – why you chose a local bakery over the Domino’s to order pizza, or why you bought an electric scooter instead of a regular one.
Before you buy any big-ticket items (like TV, mobile phone, or car), discuss why it is needed, how much expenditure will it incur, and what aspects (if any) of the family budget will be affected by it. You can tell them if you are buying in cash or on loan.
When Credit is Okay…
Exposing children to the concept of credit, loans, and interest at this age makes sense. You can tell them about all that is available on credit – from gaming consoles to higher education, and from vacations to homes.
Elaborate on the nature of a loan, applicable charges, interest, and EMIs. The most important lesson would be to tell them what could happen if you defaulted in repaying your loans – higher interest, penalties, asset seizure, and degraded credit score. This will help them identify reasons for which taking credit is worthwhile. (Read: Which loans are Good and which are bad?)
And, When It is Not
Tell your kids that loans and credit cards offer you the ability to spend beyond your means. But that does not mean that one should do exactly that. In fact, the best creditworthiness is of the people who do not need it. You can also start a credit line for your kids with clearly laid out terms for repayment. Having a credit line will give them the confidence to take measured risks and having strict enforcement of repayment schedule will deter them from overspending and getting away with it.
The 8th Wonder: Compounding
Now is also the time to introduce kids to something that Albert Einstein called the 8th wonder – compounding or making money earn for you. Tell them that delaying gratification is necessary to earn better rewards in the future. You should take your kids to open a bank account in their name, read the passbook, and open an FD. use an online calculator to show how even their small sums invested early and long enough could grow into a substantial corpus.
Investing and Staying Put
Savings accounts and deposits are the primary investment vehicles but not the only ones. Other investment opportunities – NSC, PPF, debt & equity mutual funds, and direct equity – are also available for you to explore with them. The example that Warren Buffet often uses – the snowball with a long slope ahead – is one of the best visual imageries to share with them. To help them compare different investments, teach them the “Rule of 72.” (Also Read: What is Equity? It is more than just stock market investment)
Inflations, Taxes, and Risks
Always include the impact of transaction costs, inflation, and taxes on the final returns in your lessons of returns. Kids must understand the difference between gross income and net income. Similarly, not knowing about how an investment earns your returns is the real risk. The focus should be to help them identify the risks themselves and give them the tools to do so. Try not to equate volatility with risks. (Read: What is inflation & How does it impact your Financial Plan?)
In the end…
By educating your child how to manage & talk about their finances, monetary obligations & duties, and opportunities & challenges, you are equipping them with the right tools and habits. These tips on money management for Kids will be instrumental in making them financially independent and successful.
Just like cycling, sports, and recitals, kids learn with each mistake when it comes to money. Trial and error are by far the best ways to gain experiences for a lifetime. Just remember that when they fail or make mistakes, you need to be supportive and help them identify the mistakes. If you micromanage their financial decisions, then they will not learn.
We hope that while teaching your children about money, you will also gain a deeper knowledge about it. Because you cannot really measure the creativity and imagination of children in trying to trick you or ask you all sorts of questions.