Even though I am an MBA in Finance and Marketing, I must admit that I became financially literate long after completing my education. It was a process of trial and error. It involved making some mistakes and then learning from them. Few decisions turned out to be good for me. Recently, CNBC TV18 requested us to feature in their program on personal financial planning (CNBC Program). It was during the course of shooting for the program that I retraced my own journey of financial planning, investments and building assets.
On review, I realized that this journey could have been better. We will talk about adults’ financial planning some other time, but what can be better than making children financially literate early in life? Financial literacy for kids is important since money is an integral part of most of the transactions in our life. Whether the child is paying herself or not, money is required to fulfill all her needs and desires. I can think of following quick tips for young parents to help them start gently on the path.
Few quick tips on Financial Literacy for kids
Timing for the teaching.
First step of financial literacy for kids is to get the timing right. Below five years is too young for teaching about money, so refrain from bringing money into your discussions. Otherwise, you run the risk of the child starting to give extraordinary importance to money. During early childhood, the child only needs to understand that you do not get everything that you ask for. This takes some efforts on the part of parents to get it.
Once you start bringing in the concept of money, don’t link it with scarcity. If the child grows feeling that money is scarce, this notion will stick for the whole life. I have seen people with plenty of money but still living with a feeling of scarcity. At the end of the day, what matters is how you feel about what you have. The child needs to know that money doesn’t grow on trees but one can always earn plenty of it using her skills and intelligence.
Start with Basics.
It is brand new concept for the child. You will need to start from very basics like what is money, how it is earned, how is it spent and how is it stored. This leads into teaching what is income, expenditure and saving.
For a child, even before saving, collection of money is key. Buying an old fashioned piggy bank to store all the money that they receive as gifts is a good habit. You can start a monthly pocket money for the child early on for the sole purpose of encouraging him to collect that money. It can be as low as hundred rupees a month. This money is strictly for collection and not spending.
Concept of Saving.
This is the most important idea that lays the foundation for financial well-being of the child in future. The way I explain saving to my kids is that we need to keep aside a healthy percentage of our income, say 25 to 30%, for saving, as soon as we receive our income. Then, we make sure that all our expenses are met within the remaining amount of money. If we follow the reverse process, i.e., spending first and then saving money, it is a non-starter. When the pocket money grows with time, the child can follow this process.
Closely linked to saving is the concept of postponing gratification. Simplest way to teach a child is to ask whether they want one candy today or two candy’s after two days. Surprisingly, most kids agree to take two candy’s in future instead of one today. Even if your child wants one today, it is your job to explain the benefit of waiting for a couple of days. Then, she can eat one candy and keep one in the candy bank.
Make use of brick and mortar branches of banks while they are still there.
I remember taking our children to a bank branch when they were seven and eight years old, opening their account in front of them and making them deposit some token money in the account. I took them to the branch few more times to make them deposit the money physically. When their turn came, the teller was not able to see them due to the height of the counter. She stood up and collected money from the young customers. I watched this from a distance. The experience also entailed filling up of a deposit slip etc. Off late, I have shifted their banking to online mode but the initial visits to the banks helped. However, I operate their saving bank account in front of them although they are still too young for sharing the password. They can actually see the money grow in their account, Fixed Deposits being created and rolled-over.
Interest on Money.
As soon as I asked my son to deposit his money into the bank by handing it over to the teller, he started crying,’Why should I give my money to the bank? Now, I can’t buy an ice-cream.’ This gives you a chance to link it with the process of postponing gratification. I told him,’ The bank will return more money to us after a few years. Since the bank is keeping our money and using it, they pay us a fee or rent and that makes the money grow. This fee is called interest.’ This satisfied him and he stopped crying.
For kids older than ten years
Kids elder than ten years can be easily taught the concepts of fixed deposits, equity markets, bond markets, mutual funds and systematic investment plan (SIP). You can teach these if you have taken time to understand these concepts on your own. I remember when our financial advisor was visiting us, I asked him to explain the concept of equity and mutual funds investments to our kids, He was surprised as no client in his thirty year career had asked him to do it. There are personal financial planners for every ticket size and you just need to reach out the right person, learn these concepts yourself and take help in explaining these to kids.
If you feel a bit under-equipped to start this process for your children, read two books on financial literacy for kids – The Richest Man in Babylon and Rich Dad Poor Dad. The earlier you focus on , the better. You can be a Rich Dad or a Rich Mom for your child, irrespective of the amount of money you have!!!
P.S: Some people also fix rates for the child to do household chores. This way they learn the process of doing work for money. However, we haven’t followed this practice because we feel that household work is everyone’s duty and it needs to be done in any case to secure a meaningful place. So, we ask the kids to do certain chores regularly.
My book Happiness is All We Want! is available in both kindle and paperback versions on Amazon.in and Amazon.com in most countries.
A seeker and explorer in the quest for lasting happiness, health and well-being. An MBA from XLRI Jamshedpur and a Mechanical Engineer from IIT Delhi. Has been a senior banker with large global banks like Goldman Sachs, Deutsche Bank and ANZ Bank. Working in these demanding global institutions with a gruelling schedule and plenty of business travel. Was fortunate to realise the importance of health and wellbeing early on. Learnt and practiced many wellbeing tools and techniques to focus on his own well-being while balancing the demands of a high-profile career and a lovely family.