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Saturday, August 04, 2012

What and when to teach Kids on Money Management

We saw in Part-I of this post that how important it is for all of us to teach our kids about money management. This time, we would cover on specific aspects of what they should be taught by what age so that they are ready to face the world with confidence by the time they start their jobs / own businesses.

Open their individual savings accounts
- By the age of 2 years, make sure that every kid has his or her own Savings account.
- These account(s) can be linked to your own savings account for monitoring and control.
- Make sure you are transferring some minimum fixed pocket money to the kids account every month. You can do this online as well or you can also opt for auto transfer of this pocket money.
- This sets up the base for all future education on money management that you going to impart to them.

Show them their account balance and interest credit every month
- By the age of 4 years, make sure that you have a regular habit of showing them their account balance every month.
- Show them the interest capitalised and credited to their account balance every month
- This would help them understand that savings grow to a healthy amount if you collate them and also that more the savings, more is the interest credited by the bank.

Tell them about the Amazing Power of Compounding
- By the time they go to proper school (5-6 years), teach them the concept of Compound Interest. They need not know any formulae as yet but they should realise that the money grows exponentially if allowed to grow in an undisturbed manner.
- Show them that the interest getting credited every month is also getting invested and that they earn interest on interest next month.

Let them take their own decisions wrt Saving vs Spending
- By the age of 7 years, make sure that they are making their own decisions wrt what part of pocket money they are spending and what part they are saving.
- By this time, they would already have realised that the more they save, the more the money would grow by itself. So, they would be able to take informed decisions in life on Spending Vs Saving. 
- This habit and decision making would go a long way in their lives to help them in money management.

Explain "Inflation" to them
- While they are 8 to 9 years old, tell them how the price of things keep increasing with time and that the value of money keeps going down.
- Explain them that they have got to beat inflation if they want to maintain their same life style and buying power with the money they have in their accounts.

Expose them to other forms of "investment"
- Before they reach the age of 10 years, they should understand all other forms of investments whether Fixed Deposits (FDs), Mutual Funds or Stocks.
- These will give them the options to beat inflation.
- They should also start investing some part of their money in FDs (which can also be done online). 
- Show them how a Fixed Deposit earns more interest than a savings account and helps them beat inflation (to an extent).

Well, if you have done this much, you have done what no school or college would ever do to their lives. You will start seeing sparkling results very soon. I have realised this with my 2 daughters. Today, they know much more about money management than any other grown up adults around them. They may not be earning money yet, but they exactly know how the money can be managed well.

When asked about what she wants to be when she grows up, my elder daughter, who is now 11 years old, snapped "I will see Dad !!, I know that i would be financially free by the time i start my job - so i have to really think - may be a Sea Animal Trainer". You are amazed !!, I am not... I know kids are great at learning and can outclass you. Trust them and give them the opportunity they deserve.

Happy money management !!

Cheers !!

Manoj Arora

Facebook : http://www.facebook.com/RatRaceToFinancialFreedom
Twitter : @manoj_216
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