Developing Financial Skills
A global survey done by Standard & Poor’s Financial Services LLC (S&P) showed that only 33% of adults in the world are financially literate. In emerging economies like India the rate is even lower (approx. 25%).
Youth across the world are not even aware of concepts like inflation and compounding. In most of our schools, financial literacy is not a priority, even though financial knowledge is of utmost importance to be successful and stress free in the world we live in.
I have heard parents say – “We don’t want to make our children money-minded. They should be taught values like kindness instead of the importance of money”.
To them I say – It is not an ‘either-or’ situation. You can teach about kindness, honesty, caring and all other values because these are what define a person’s character. But along with these you can also teach them about money. Money is a fact of life, and an important one at that. Teaching a child that money is important is not the same as teaching them that greed is good.
Age to Start
Many of us wonder what is the right age to start teaching children about money. In my experience, once children start developing numeracy skills, an understanding of numbers, is the right time to start. That would be around 4-5 years.
How Can We Introduce the Concept of Money
1. Tell them about the history of Money
For very small children, parents can start by giving them an understanding of the history of money – starting with the barter system in olden times, to the concept of gold and silver coins to the currency notes that we have today and the banking system. It is important to understand why there was a need for ‘money’, what is the meaning of ‘value’ and how today’s money standardizes the ‘value’ of a currency note.
2. Talk to Children About Money
It is important to talk to your children about money. It should never be a subject they are not comfortable with or something that scares them. A lot of us believe that we will make our children ‘materialistic’ if we talk about money. It is not so. They have to live in this world and money has always been there and will always be there in some form or the other.
When you talk to them, it is important to remember 2 things:
Do not lecture them. Give them examples from your own life or others’ life. Talk to them about some simple financial decisions you made. Ask them their opinion on whether they think it was right or not. Understand their thinking behind what they suggest and follow up with counter reasoning if required.
Talk to them frequently and for short duration. Do not give them a complete download of information for hours on one fine Sunday and then completely forget about it for the next few months. Discuss examples, concepts etc for 10-15 min at a time and do it often.
3. Teach them importance of saving
Saving money is something that children should be taught from a young age. Give them a piggy bank when they are very young and open an account for them when they are a little older. Encourage them to save for something that they really want to have. You can also suggest that you will contribute a part of it when they have saved the remaining. For example you can contribute 40% if they are able to save enough to contribute 60%.
4. Let them earn money
I have heard people talk about giving pocket money or allowances to children and others who believe nothing comes for free and children should earn everything. I am not a stickler for either case and believe that a combination works very well. Allowances can be given to children. However, allowances should never be too generous.
They should also be encouraged to earn extra if they want more money. Give them options of work at home – like washing the car on weekends or buying groceries from the nearby store, watering the plants everyday or the like depending on their age and the type of work that you need getting done at home.
There could also be opportunities in nearby libraries or other places where they can help for a few hours a week (to arrange books etc) and earn some money as well.
Note – Do NOT let them ‘earn’ money for chores like cleaning their room or keeping toys/clothes/books in proper place or any other activity which they are expected to do. These are things which they should be doing in any case. I have seen some parents give rewards for such tasks and it usually backfires because children then start believing that it is not really their responsibility. ‘Earning’ opportunities should be only for work over and above such tasks.
5. Allow for mistakes
Let them make mistakes. If they have been saving for a toy/gadget/instrument, but in between decide to spend the money on treats – let them. They might end up disappointed, they might ask you for extra money (which you should not give), they might even get angry or throw a tantrum. Let them be. Do not interfere with their decision making unless they ask for your opinion, and even then you just advise and not make their decision for them. Let them decide on their own. Let them feel the impact of their decision. It is better that they learn their lessons early on when stakes are low rather than later in life.
6. Do not form their opinions for them
I have seen some parents, who have had a bad experience in the stock market, tell their children – “Stock market is bad. You must never put your money in stocks – ever – or you will end up losing it all”. Or “Never buy real estate. It is bound to end up in disaster”.
There is obviously value in your experiences and you should definitely share the insights but not form their opinions. After all many people make a living, and a good one, out of share trading/investing. Real estate investments have made many people rich.
What you should tell them is the mistakes that you made and how they can avoid those instead of making highly opinionated statements. Such statements can have a profound impact on your children and the way they handle their finances and investments as they grow up. What you can say is – “Stock market trading can be risky. It is easy to get carried away and therefore you must do your research well before you invest.” And follow it up with the example of the mistake you made and how you could have avoided it.
There are a lot of games that you can play with your children to give them a deeper understanding of financial skills and knowledge – to make them understand the concepts of interest, debt, compounding, entrepreneurship etc. I will be posting these games soon so keep a watch out for this section!