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Parents often feel responsible for the decisions that their children take growing up in life. They often try to bring them up with good moral values. But in addition to having a morally responsible child, parents wish their child to be financially successful in life too. Most parents don’t discuss the money part with their children. And the schools have everything in the syllabus but don’t have a curriculum on financial literacy. The result is that the children often grow up and learn many financial aspects by trial and error and sometimes the mistakes prove to be costly for their financial well-being.
“Like all learning, financial education is a process that should begin at an early age and continue throughout life. This cumulative process builds the skills necessary for making critical financial decisions that affect one’s ability to attain the assets, such as education, property, and savings, that improve economic well-being.”
– Alan Greenspan, economist and former chair of the Federal Reserve of the United States
The above statement by Alan Greenspan is self-explanatory. We will discuss how the parents can raise a financially responsible child:-
1) Pay bills on time-
Kids are always curious to know more about many things in life. Rather than brushing aside the money aspects, explain to them the importance of matters like paying bills before spending on the non-essential things in life. When they are old enough to understand this it will give them a basic idea about the cost of living. Be honest about what the family can and can’t afford and this will give them an accurate picture of what to expect and how to manage things.
2) Teach the importance of budgeting-
If you are employed and doing a job, tell the children that you are getting a fixed income and every financial expense in the month has to be managed with this income. To do this, prepare a budget, and this highlights the importance of budgeting, the money coming in and the money going out as expenses? The balance money is for investments. This will teach them how to manage their money in an efficient way and save for investments. List the items that are needed to be procured during the month, are urgently required and the remaining that are not so urgent can wait. Strike down the unnecessary purchases.
3) Do some smart shopping-
Children are influenced by the environment around them. When you exhibit to them that you don’t buy items at any cost except at an affordable price, it would teach them the value of money.
Take them to the vegetable market and they would know the price difference by themselves. There are many vendors displaying and quoting different rates. Look for good quality vegetables at a cheaper price. This will teach them that the items have value and have to be bought at the right rates.
Take them to a grocery store near your house and the supermarket chain and they would learn themselves by comparing the prices. Explain to them the difference in quality and the ones which come at a cheaper price.
Online shopping has become very convenient nowadays and after visiting the supermarket chains they will learn to compare the online price. This will inculcate in them to search for value for money items. Even elderly people who were averse to online shopping earlier have begun to shop online during the pandemic. The children are quick to pick up things and will learn to compare prices.
4) Living within your means-
Learn to say no to the children rather than giving in to all of their demands. You love your child and may wish to pamper them but saying no to unnecessary things saves you additional stress. The children learn to live within the budget; it will not raise their standard which they would find difficult to manage or which they may not be able to sustain when they are grown up.
5) The concept of work and reward-
Once the children can count money give them an allowance. Make them count money and this can be done when receiving cash during shopping. These days there are cashless transactions with not many emotions involved and the kids should be taught about the cash part too. Send them to a nearby grocery shop to run small errands and they would slowly learn themselves the cost of goods. By making small mistakes they would soon learn the basic cost of goods and the value of money.
Let the children learn about work and rewards. Give them an allowance for work other than basic household chores; making the task worthy of incentive, like washing the car. Understanding the connection between work and reward will help them come up in life.
6) Managing a bank account-
Open a basic savings account in the bank with your child. When the kid is below 10 years of age the account has to be jointly operated with the parent and when the child is between 10 & 18 years the account can be operated by the child themselves.
Encourage the child to save pocket money when they get it and it can be kept in the bank account. Discuss the savings account and the interest they are getting. Explain to them about the fixed account. Whenever they need money they can withdraw funds from the bank. They can then tally the balance amount. This would teach them the basics of keeping money in the bank, the interest rates, and how transactions can be done.
7) Walk the talk-
Practice a culture of saving money yourself so that the child would see it. Since they are young they would follow you and form a habit of saving from a young age and being financially responsible.
8) Teach them about the stock market-
It is always a good thing to have a basic knowledge of the stock market and mutual funds. The interest rates in the fixed deposit account have a low rate of interest in India. The stock markets and the mutual funds can provide much better returns over the bank deposits if held for a long time.
If you don’t have knowledge about the stock markets encourage your child to invest in the mutual funds where the fund manager would take care of the portfolio. If you have knowledge about the stock markets open a brokerage account for your child and teach them to hold good stocks over a long period of time. Good stocks can give inflation-beating returns when held for a longer time horizon.
9) Teach about financial goals-
Encourage your child to take up a job during summer vacations when they reach high school. This will not interfere with their education and encourage them to save money as they will earn pocket money for their expenses. With the money earned the hard way they would learn the value of money. Encourage them to save money and teach them about financial goals in life and how to make investments for reaching these goals.
Once the child is earning they would have their own account and apply for a credit card. Explain to them the importance of credit card payments on time and the pitfalls of late payments as the credit card companies charge a hefty interest on late payments. If they are delayed in making payments it would spoil their credit score, show up in their credit reports and they will get loans at higher interest rates in the future.
Parents can lay a strong financial foundation for their children. Grooming them from a young age will equip the child to make good financial decisions and equip them to take responsibilities well when they are grown up. Right decisions will help in raising a financially responsible child.