Here is the transcript if you’d like to read instead:

Jaya:

Welcome back to Kairos, a podcast on financial planning where we talk about doing the right thing at the right time. Hi Susithra.

Susithra:

Hi Jaya and hello to everyone who are listening in.

Jaya:

New year is just around the corner, and most of you would be getting ready to learn new things or build new habits. In today’s podcast we will introduce you to the topic of how you can teach your kids about money and make them financially ready to face the future.

Susithra:

You are right Jaya. New year brings new hope and new learnings, and it is a good time to introduce the concept of finance to children. It is more crucial to teach kids the value of money early in life for them to be money smart in the future.

Jaya:

So where do we start? Finance is a complex topic, what are the concepts that parents should start with?

Susithra:

Well, it is important to keep the concept simple and straight forward while teaching children. Children as young as 7 years can somewhat comprehend the concept of money.

        1. Concept of money – first step towards building good money habits is for them to understand the concept of money. Money or any currency for that matter is a legal tender and making kids understand that money has an assigned value and it is useful for buying a specific item such as toy or chocolate. One way to make them understand the concept of money is take them along with you to shops. Show them the price label and the bill once you make the payment and associate the item with payment made.
        2. Concept of Saving – Once children understand that money has a value, they will easily grasp the logic of why they must save. To build the concept of saving buy them a piggy bank or even a glass jar, this will help them visualize money accumulating.
        3. Concept of Investing – Once a child starts with the habit of savings, slowly introduce the concept of investing (i.e.) where their money grows and works for them. Nowadays you can open a bank account in the name of your child and take them along with you when you are visiting your bank to explain them the concept of interest rate. Though this might be a little difficult for the child to visualize when compared to a piggy bank, it is a good first step to start thinking about rate of returns and investments.
        4. Cashflow and Budgeting – Teach them the difference between an income and an expense. To start with ask them to keep track of how they spend their allowances. You can assign a separate notebook in which they can keep track of their spending and at end of the month or a week help them to tally their inflows and outflows. Parents have to be careful not to chip-in with extra allowance in the middle of the process though. As it will set a negative precedence.

Jaya:

Well, that covers the basic concepts of personal finance that everyone must understand. But what process should a parent keep in place so that it becomes easy for the child to understand these concepts and implement them in real life.

Susithra:

Very good question. Understanding the concept is different from actually implementing them. There are few ways you can motivate a child to start implementing what they learn.

        1. Give them weekly or monthly allowance – we spoke about understanding money and building the habit of savings. But how will a child learn all this if he doesn’t have actual cash in his hands. So, it is important for parents to allocate some allowance to their children and then make them implement practically what they have learnt. You can decide on the value and frequency of such allowances, but make sure that you stick to the allowance and do not pitch in between.
        2. Teach your children to set goals – Setting goals gives that motivation to start saving, and when the child achieves the goal, it also acts as positive reinforcement, motivating them to continue with the habit of saving. One way to help children save towards their goals is by assigning different compartments for each goal, for example: you can have different glass jars labelled for each goals, and motivate the child to put in a portion of their allowance into these jars. Set a timeline for these goals, and at the end of the period, make the child use this saved money towards purchasing the item. This method will help the child to budget and save towards purchases even in the future.
        3. Let them make their own decisions – One way to help a child understand the value of money and opportunity cost is by letting them make their own financial decisions. Start small. Next time you take your child shopping, assign a budget for the total amount the child can spend towards his purchases for that day, and let him decide which items he wants to buy but make sure that you stay within your budget. Once the child understands that he is responsible for making the decision and whatever items he buys that day is what he will get, he will start understanding the concept of opportunity cost. This will teach them to stay within their means and not to overspend or do impulsive purchases even when they become adults.

Jaya:

Well, the concept of maintaining separate jars for separate goals seems like a good place to start thinking about budgeting and savings for a child. Till now the topics we covered is applicable for younger children, what about teens or young adults. What topics should they be aware of?

Susithra:

Well, for this category of children we can introduce little more complex financial concepts such as credit cards, loans, and asset diversification.

        1. Credit cards – Though not a bad thing by itself, it is important to understand the concept of credit. Nowadays, we see parents handing over their credit cards to their grown up children without educating them about the consequences of using a credit card. Most banks now offer student credit cards, so it is imperative that parents teach the pros and cons of a credit card to your child, and warn them about the interest that banks charge on unpaid outstanding amount. Make sure that they pay off all outstanding balance as and when due to avoid unnecessary interest charges. Again, giving them an allowance and making sure that they spend within the limit is the key.
        2. Loans – Educate the children about the concept of loans and different types of loans that are available in the market. It is good to start with student/education loan as it is the most relevant to children. This will be most beneficial for those children who wants to pursue education abroad.
        3. Asset diversification – Once you set the foundation about concept of investing to your children, the next step is to expose them to different asset classes that are available for this purpose. Teach them the pros and cons of each asset class and make them understand the importance of asset diversification. You can even allocate some fund for them to manage on their own to gain practical experience. If they make a mistake take it as an opportunity for them to learn and correct it in the future.

Jaya:

Rightly said. Letting children make mistake and learn from that is crucial as that is how they develop a positive relationship with money. Are there any things that parents should keep in mind in while raising money smart children?

Susithra:

Well, till now we covered things that the parents must do in order to raise financially smart children, here are few things they should not do or be careful about

        1. Children are very observant, and they follow what they see. If a child see his/her parent not following a disciplined savings behaviour or parents making impulsive purchases at the shop, they tend to believe that is how one should behave. So it is important for parents to practice what they teach.
        2. Do not break or change the rules once you set them. For example – if you allocate an allowance to your child and assign them a responsibility to meet their goal, stick to the budget. Do not give them extra allowance if they fall short or if they spend the money on something else. If a child thinks the parents will always come for their rescue, it becomes difficult for them to stick to the plan. This will have a huge impact once they become adults responsible for their own lives.
        3. Don’t overdo it. Though it is important for children to understand the concept of money and how it works, parents must keep it simple. The idea here is to let the children learn and not to impose something on them. Parents should also teach children the importance of charity or giving. This will help them set a balance between saving for their personal needs vs empathizing with others who need financial support.

Jaya:

That was a great suggestion, and I am sure many parents will find this useful. To quickly summarize

  1. Teach the children the concept of money, importance of budgeting and saving and make them implement these learnings practically.
  2. Educate your children about credit cards, and loans and the proper way to use them.
  3. Help your children build the habit of setting financial goals and planning towards achieving them.
  4. Lastly, how you behave towards your finances will have an impact on your child’s view of money. So, practice what you teach your child and be consistent.

That’s it from us today. If you enjoyed listening to this episode, please share it with your friends! Thanks for tuning in, see you next month.

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