Money management: How to make it a child''s play

With the evolution of technology, growing costs and changing lifestyles, we need to ask ourselves if the generation "Z" is learning enough about financial management. This is a question that parents need to ask themselves and prepare to teach their children the importance of money management from a young age. Furthermore, it is important to impart "age-appropriate" money-management lessons to your children.

Consider the findings of an ASSOCHAM study conducted in India a few years ago. The study named "Trends of pocket money in urban areas" revealed that school and college-going teenagers in metropolitan cities are getting anything between Rs 3,600 to Rs 12,000 per month as pocket money. Research shows that this is primarily being spent on visits to malls and multiplexes, mobile recharges, electronic devices and other e-commerce activities. 

In comparison, a decade ago, teenagers who received Rs 450-500 as pocket money per month, considered themselves "rich". This change highlights the need to teach the next generation the essentials about money as soon as possible.

Here are seven tips that will make the task fun and effective besides instilling in children the importance of cultivating good money-management habits.

Encourage children to use cash for small-ticket purchases

While credit and debit cards are more convenient, children, without you sometimes realising it, are paying attention to how you spend or manage your money. Using plastic money doesn't allow them to see the actual exchange of money for purchases. We should encourage children above a certain age while making small-ticket purchases such as a cup of coffee, snacks, movie tickets, etc. to use cash. This will allow them to understand and witness a physical transaction involving the exchange of cash for goods or services. It drives home the point that in order to make a purchase you have to hand over your hard-earned cash.

Explain the source of cash with the help of a visit to the ATM

Given the increased use of plastic money for all transactions, children have a hard time wrapping their heads around the concept of limited funds. Hence, money to them is often thought of as an unlimited and inexhaustible resource. We need to explain to children how it is important to work hard for money. This money is then transferred to our bank accounts through a series of transactions. For a young child of 3-4 years, the ATM is actually a great place to start with, where you can tell your child that money does not really come from a machine, but when you use the machine to withdraw funds, the balance in your bank account goes down.

Leverage lessons from the supermarket

For slightly older children who accompany you to a supermarket, ask them to help you in picking up household supplies. You could tell them to take a pick from an aisle and explain the difference between a lower and a higher priced product in the same category. The affordability factor is important in this context and the supermarket is a great place to establish this. This will also be a good starting point to explain to children why one brand/product is more expensive or different from the next.

Inculcate money values by setting expenditure limits

A young child of 4-6 years of age can be taught the difference between needs, wants and wishes. Usually, this is when, children start receiving monetary gifts from friends and relatives on birthdays and other festive occasions and is probably even getting some pocket money as well. It is a good idea to help them understand what they can do with the money that they receive. Teach them to spend judiciously on needs versus different wants. Instead of gratifying each demand, you could take the opportunity to teach them the importance of savings. For fixed expenses each month, such as mobile phone recharges or multiplex or café visits with friends, encourage them to start maintaining an account and encourage them to spend within the amount of pocket money they receive. Encourage them to set a limit or a budget for their expenses. A teenage child can be introduced to the concept of making small savings every month towards a particular long-term goal such as the purchase of an expensive gadget. This could serve as a teenager's first lesson in financial planning and setting long-term financial goals.

Cultivate financial independence

For long-term wishes, children need to be taught the virtue of patience. Instead of depending on you to fulfil every wish, teach them that long-term savings will help them fund their own wishes such as buying an expensive gadget or the wish to throw a big birthday bash. Help your child understand that by saving their money now, they can buy things that are unaffordable now. Encourage children to save diligently with a specific goal in mind. For children under the age of 10, it may even be a good idea to open a bank account that comes with a debit card designed for children in particular. This will also help children learn the lesson of valuing purchases and gifts as they would have earned it. Children should also be taught to look at their bank account and see how it increases with the addition of interest. This will build the desire to save and act judiciously with money from a very early age.

Lead by example

Lastly and most importantly, lead by example. As a society, India is very savings-oriented and culturally our parents and their parents have taught us and them the value of savings for future needs. Children essentially emulate the habits of their parents. So it is important to lead by example by encouraging the value of thrift, setting out financial goals, saving up for emergencies and spending judiciously. If parents are responsible with their money and have passed on the same parenting values to their children, they can be reasonably sure that the kids will handle money matters prudently when they're on their own.

Ashish Vohra, Senior Director & Chief Distribution Officer, Max Life Insurance