It is vital to provide children with a clear and thorough understanding of financial literacy at an early age. You should also instill money management skills in them so that they think and act responsibly throughout their life. A realistic budget map, credit and debt management lessons, development of saving habit and a basic lesson on investment are some of the financial topics you can discuss and teach your children at an early age. Come what may, a child’s first financial lesson should begin from his or her parents or guardians and only this will ensure a strong foundation of lasting financial competence for them.

Let us find out what financial lessons you can pass onto children belonging different age groups:

Ages 3-5- Wait… Save… Buy!

You can follow the below mentioned steps to develop this habit in children:

  1. Teach the child the importance of waiting and by doing so you will inculcate the habit of patience into the child. For eg: if the child sees a toy in a store, do not immediately buy it , instead ask him to wait for a better toy or something else which is more important than the toy. This way the child will learn to be patient in any given situation and also will gradually learn the art of saving money.
  2. Label three jars as “Saving”, “Spending” and “Sharing”. Once the child receives money from daily chores or from a birthday, ask him or her to divide the money equally among the three jars. He can use the “Spending” jar money to buy small things like candies or stickers, can use the “Saving” jar to purchase expensive and important items and use the “Sharing “ jar to donate to a particular cause for a friend or any other form of charity.
  3. Teach the child to set a goal so that he has a clear idea about what he wants with this saved money. Each time your child adds money to the piggy bank, make her count how much she has and make her understand how much she needs to achieve her goal and how much it will take to reach her goal.

Ages 6-10- Choose and Spend

At this age the child needs to know how to differentiate between important things and unimportant things when it comes to spending money. For that you can involve the child in the following activities:

  1. Involve your child in some financial decisions, for eg: explain the reason you choose inexpensive products with the same quality or talk about deals and discounts in a store and how you can make use of it to fit your financial plan.
  2. Hand over some money to your child, say like Rs 2 and ask her to purchase something from the store within the limits of what you need. This will give them a clear idea about how to make choices while spending money.
  3. Use sentences such as “Do we really need to purchase this item for this week?” or Would it be better if I buy this item from the next store as they have a discount going on?” etc. This way the child will take the initiative to make decisions and also will be able to think and give opinions. It is not necessary that the child should give you financially suitable opinions; however they will make an effort to think about the money in hand and how you can use them appropriately.

Ages 11-13- Save More for Better Growth

At this age inform the child about how his savings can reap more money in the long run. Here is where you introduce your child to the idea of compound interest and also interest on the past savings.

You can involve your child in the following activities:

  1. Use specific numbers to explain the idea of compound interest rather than giving a theoretical explanation, which may bore the child in the end. You can explain to the child that if he sets aside Rs 500 every month from the age of 14, he will be able to retrieve Rs 2600000 by the age of 60, but at the same time if he sets aside the same amount from the age of 35 he will only be able to retrieve Rs 4, 57000.
  2. Make your child do some compound interest calculations on websites such as www.investor.gov  or www.thecalculatorsite.com etc. These websites will help your child understand how she can grow her savings if she invests them appropriately at a certain set interest rate.
  3. Help your child set a longer term goal for something more important and expensive than the things that she has been saving for. For eg: Discourage your child from buying a snack every day when she returns from school, instead ask her to save that money so that she can get herself a laptop at a later time.

Ages 14-18- Education and Finance

Duly inform your child the importance of education and how they can impact your life in the long run. And for that you can involve your child in the following activities.

  1. Once you decide to enroll your child into college, start discussing the details about the tuition fees and also how much you can contribute to your child’s education every year. This activity should be initiated at an early stage ie, when your child reaches the 9th  or the 10th standard. This will help the child realize the importance of education and would be able to avoid unwanted distractions.
  2. Discuss the employment prospects of each course and also how much each college costs, student loan details and how it can affect the lifestyle of your child during graduation.

Ages 18+- Use the Credit Card, but pay off the balance

Educate your child about credit card debts and how it can affect your credit history in the long run. Basically teach your child to use the credit card or the debit card responsibly and train them to use the cards only during emergencies. You can adopt the following activities to teach your child more about the usage of plastic money.

  1. Inform the child that any late payment on the credit card can affect the parent’s credit history.
  2. Both the parent and child can choose the credit card together that offers low interest rate or no annual fees. You can visit websites such as Bankrate, Creditcards.com, credit.com or cardratings.com for more on such information.
  3. Educate your child on the importance of emergency savings and how it can be used appropriately to handle any given situation.

The Indian education is yet to develop a subject on money handling and financial discipline, till then you can follow the above steps to introduce your child to the financial world and help them handle money appropriately.

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