“My child does not need Money Lessons, She knows it all”. This was one of the responses i received from one of the parents during a social gathering. The topic of the discussion was “Today’s generation does not know the value of money”. Some of the parents stressed on the need of imparting money lessons to a child from an early age. I completely agree and concur. I decided to share my thoughts on this topic through a blog post.
As i keep highlighting in my posts that from a personal finance perspective, India is one of the most financially illiterate countries. Due of this reason financial misselling is rampant in India. Out of Ten, Nine investors are not aware that bundling of financial products is illegal. The most common excuse given by them is that Personal Finance is not my cup of tea. In fact, one of my friends jokingly told me that if everyone will be financially literate then who will visit your blog :). I told him that i will be the happiest person that day.
On the personal front, i keep imparting money lessons to my kid. I take care that teachings should be interesting, interactive and easy to understand depending on the understanding level of a child. At the same time, it also helps me to understand what today’s generation think about money. Sometimes it is shocking to me. In one of my posts, i shared Importance of teaching financial discipline to kids.
One of the most common mistakes from parents end is a comparison of their childhood with that of today’s generation. It is not a right comparison as things are 360-degree upside down compared to 30-40 years back. The upbringing of today’s generation is like that of prince and princesses. During my childhood, the biggest fear was of capital punishment that is missing today. Though i am not in a favor of capital punishment but during my childhood it was common in school and at home. Those days, i strictly followed the instruction of my parents on how to spend my pocket money. Therefore, today’s money lessons are totally different from money lessons given to me by my parents/teachers.
Let’s check out 7 imp money lessons that are relevant in today’s context.
7 Important Money Lessons You Should Teach Your Child
1. Supply of Money is Limited:
Any technological revolution has its own advantages and disadvantages. As i keep highlighting in my posts that we are transforming to a cashless economy. Last year, i conducted a survey to find out possible reasons why people don’t use a credit card. One of the quite surprising reasons was that people tend to spend more. I agree to some extent but i found one more peril recently.
As i advocate cashless economy and use of digital money. Therefore, one of the money lessons to my wife is to minimize the use of cash. At the same time, I and my wife follow a monthly budget to avoid financial distress. It is now deep rooted in my child’s mind to use credit/debit card as and when we order/buy something. Recently, my daughter demanded a big ticket purchase. My wife refused and explained that it will stretch the monthly budget. My kid replied, “What’s the big deal, you only need to swipe a credit card?”.
It was quite shocking for me and my wife. When i probed, i could find out from child’s psychology that they think “Money Supply is Unlimited”. In other words, Money is virtual and whenever you need, it is as simple as swipe/enter the details of credit/debit card. Here CASH scores over Digital Money. Cash is tangible and a child can see it depleting and will make efforts to replenish the same. After this incidence, i made a point to use CASH to teach one of the important money lessons that “Money Supply is Limited“. It helps the child to touch, feel and understand the importance of real money. It is important to instill fear of losing the same (in literal terms).
2. You have to Earn Money
Another important money lessons for children. It is NO Brainer but how to teach. I linked the “earning of a child” to the accomplishment of some imp household tasks and academic achievement. This is tried and tested money lessons from ages. It teaches a child that they have to work to earn money. There is no easy money. For example, a child has to finish his/her all the meals for 7 days to order a burger/pizza. It is helping me to save some money also :).
During my MBA, i learned about needs and wants. The first practical use was very recent. As a responsible parent, i have divided all the demands of a child into needs, wants, and luxuries. I fulfill all the needs of a child but a child should earn money to fulfill wants and luxuries.
3. Incentivize a Child to SAVE MONEY:
The next in the list of important money lessons is to encourage a child to save money. At a young age, a child will not understand the savings linked to the goals. For example, if i tell my child to save for higher education or school fees then it might not have the desired impact.
The best way is to change the goal and incentivize a child for saving money. If the monthly pocket money is Rs 1,000 then as a parent i target national savings rate of 30%. Here the assumption is that Rs 1,000 is reasonable amount depending on the age and needs of the child. Therefore, if a child saves Rs 300 out of Rs 1,000 then i pool equal amount next month. Hence, the pocket money for next month will be Rs 1,300. It will encourage the child to save more and teach one of the important money lessons on savings.
At the same time, you can open a savings account in the name of the child and encourage them to deposit savings i.e. Rs 300 in a savings account. It will help them see their savings growing. Alternatively, depending on the amount and age, you can also invest in PPF in the name of a child that will earn decent returns in long run. Gradually you can teach financial investments to a child.
4. Gain and Loss is Zero Sum Game / How to use Money wisely?
As i keep highlighting that all money matters are zero sum game. For example, the stock market is not a money generator. Loss of investor A is Gain of investor B. From a child’s perspective, it is one of the important money lessons to use money wisely. It helps to take right decisions on money matters.
Some time back, my child was in a dilemma whether to buy a Kindle or TV for Kids room. It was a tough decision for her. Normally, the children will be inclined to buy both in such scenarios and parents oblige. I insisted on deciding on either of them i.e. Kindle or TV. I assisted her in taking a decision. I told her to list down pros and cons of both & then she can decide. By doing this i encouraged her to take her own decision.
Therefore it is critical to impart money lessons on how to use money wisely i.e. to gain A, a child has to compromise on B.
5. Lending and Borrowing:
It is a complex subject. Due to consumerism, the western economies are under stress or collapsing. People are borrowing beyond their means then finding themselves in a deep financial crisis. This problem arises when we fail to judge that the amount borrowed has to be repaid. As i shared in my post, Kids Marketing is a new trend and is fueling consumerism. Easy money from parents fails to teach important money lessons of lending and borrowing to a child.
Thus, it is important to teach the concept of lending and borrowing to a child. Any borrowing should be backed by thought process on plan/how to repay? At a young age, personal lending from family or friends is common. Though the amount is small therefore as a parent we don’t insist on recovering the same from a child. It is a mistake because children start thinking whatever they borrow, it is not necessary to repay. Thus an early sign of bad debt/financial management.
6. Don’t be Dependent on Parents:
I would like to share a real life example that was shocking. One day, one of the friends of my daughter was telling her that “you know my parents have a lot of money”. Once in a month, they count the same and it is a huge amount. This is one of the reasons why the business empires built in past are doomed now.
As a parent, if i flaunt my money in front of my child then i am at fault. The child will not understand the importance of money. They start assuming that they need not do anything in life and their parents have enough money. In other words, they can survive and live a comfortable life without doing anything. The parents should teach money lessons on how difficult is to earn a money and a child should become self-dependent. They should also share the hardships faced by them to reach where they are.
7. Quantify the Money
Now you must be laughing that money is already quantifiable. I agree but normally children are not able to quantify in relative terms. For example, one of my friend’s child told his father to buy a bunk bed. His father told him that it costs 50k. Now the psychic of a child is that 50k is not a big amount. The reason for this psychic might be his friends who must be discussing this in the class.
Whether 50k is a big or small amount, it is subjective and relative. The son of my friend was not able to quantify this amount. If my friend will not correct this situation then gradually it will be deep rooted in the psychology of the child that 50k is a very small amount.
Though there is no right or wrong method to quantify the money but i always quantify it to no of working days required to buy anything. I suggested same to my friend. He earns 90k per month. Therefore, he told his son that it will require him to work for 17 days to save money for bunk day. It helped the child to realize that it is a good amount of money to spend.
Words of Wisdom:
In this post, i shared some of the important money lessons followed by me to teach my child the value of money. The critical aspect is to explain it in easy to understand language. I believe that if a child learns money management at an early age then it will help him/her to face all the ups and downs of the life. The child will be flexible in his approach towards money matters.
The financial crisis is nothing but rigid approach towards money matters. I should be flexible enough to manage my expenses within an income of 1L per month and even within 40k per month. Some people say that “life” teaches money lessons on its own. I agree but teachings of life are sometimes harsh and cruel. As a parent, you should always prepare your child to face any kind of financial situation in life and how to handle such situations. In order to do that, it is important to learn/teach the money lessons right from the young age.
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