Parents want the best for their children. They are ready to give an arm and a leg for them to get the best education their money can buy. It is quite easy to forget that education is not just academics. One aspect of children’s education often overlooked is financial education. The basic assumption is that once they get a good job, they can live happily ever after.
The times we are living in have changed. The industrial age advice of ‘Go to a good school, get good grades and get a good job as a ticket to a good life’ is no longer valid in the information age. Good grades from good schools no longer guarantee jobs. Even when you get a good job, you are not guaranteed a good future. Job security is no longer a given in the information age. Your employer cannot guarantee lifetime employment.
A fewer number of people stay in one company the rest of their working lives. Even if they plan to stay, the company can lay off workers, go into a merger, get acquired or go out of business. A large proportion of the biggest companies in the world like Google, Microsoft, Apple, Amazon, Facebook etc. are not the oldest. Technology is constantly changing the landscape of the marketplace. The big companies you see today, you may see them no more in years to come.
Raising children the way most of our parents did is preparing your children for a world that no longer exists. There needs to be a conscious effort by parents to teach their children how to make money work for them. If a child is old enough to follow you to the ATM, the lessons can begin.
Teaching your children about money does not require an all-day seminar or a series of boring lectures. It should be a natural part of everyday conversation. This is often triggered by questions children ask directly or indirectly about money. These are teachable moments you can seize to drive home an age-appropriate lesson.
Children are always asking questions. Most children, especially the female variety, love shopping and are constantly requesting parents to buy them something. Each time you say no, you can explain why. They may pretend they are not interested, but they are listening. Such opportunities come often; tell her why she cannot have that iPad or smartphone now, why money should be set aside for saving and investing, school fees, house rent etc before spending, the importance of delayed gratification, why you can’t do what everybody else is doing etc. Let them know that the Joneses are broke.
Don’t shy away from answering their questions. Be bold enough to say you don’t know. That is a good opportunity to seek the help of someone who does – your banker, financial adviser, relative, online (personal finance websites, blogs) etc. You also need to buy them age-appropriate books on personal finance. There are story books that teach basic money lessons.
Are we poor?
My daughter once asked me if we are now poor, after I rolled out some cost-cutting measures to reduce waste. Your child can ask you how much you earn etc. Children are often worried about financial security. When they ask questions like this, they are not after the hard numbers, but the sense that everything is okay (their standard of living will not go down). There are three answers to this – you do not earn enough, you earn enough or you earn more than enough.
If you don’t earn enough, let the child know this is the reason why you cut back on some things. If you earn enough, reassure the child that you are able to take care of basic needs, and once in a while some wants. Let the child know why he cannot have everything his classmates have (or claim to have). If you earn more than enough, tell the child you have enough and a little more. Don’t give the child the impression he can have whatever he wants.
When I go shopping with my son, I tell him the budget for each item. He goes to work to bring the items that fit my budget, and tries to persuade me to go for the cheaper option so that we will have some money for other things.
Allow the child to handle money
Create opportunity for the child to handle cash. It could be in form of a monthly allowance or occasional gifts. Part of the allowance should be saved in a piggy bank and later transferred to the child’s bank account. Based on age, the child with guidance can start investing in the money market to earn interest, and later in shares etc.
The child should have some spending money based on age. Create opportunity for them to go and buy something and collect change. A child learns priorities when the money in her hand can’t buy all the items on her list. She will be forced to decide what stays and what goes. This will help the child in taking money decisions as she grows older.
Be a good role model
Actions speak louder than words. You cannot give what you don’t have. Be a good role model to your children financially. For their sake, learn and get your finances in shape. Learn and understand the basic concepts – assets and liabilities, pay yourself first, financial independence, asset allocation etc. Don’t be a mistake to avoid. Children tend to adopt their parents’ money habits and even when they know better, they have to make a sustained effort not to make the same mistakes daddy made.
The school system is currently not equipped to teach children about money. It falls back on parents to prepare their children for life in the real world. You don’t want to be subsidising your children long after they have left home and started their own families. If you plan to pass on wealth to your children, you don’t want them to squander it and go back to square one. You want them to grow it and pass it on from one generation to the next.