As humans, we are slave to our habits. We first create our habits, and then our habits create us and the perception of who we are.
This can be good, or not.
In the context of money, saving and investing is a good habit. Maintaining a lifestyle that requires you to depend on your credit card is not a good one.
Given how important financial skills are to navigating life, why don’t we consider inculcating good habits in our children with regards to money and saving?
A study out of Brown University concluded that habits formed in children are unlikely to vary after the age of 9. A University of Cambridge study found that money habits in children are formed by the time they’re 7 years old. The message is clear, as parents, we need to impart some good financial habits to our kids. If we don’t, society will.
Here are some basic concepts or principles that can be explained to them.
Savings.
Children often get monetary gifts, either at birthdays or festivals or family functions. At least a portion of this amount, if not all, can be saved.
Convention tells us to have a piggy bank. I agree with the principle, but kids gravitate towards visuals. Having a glass jar (which your child can even paint to make it colourful) makes the entire exercise much more tangible. They can see their money accumulate and grow.
If your child is older, then take her to the bank and open a savings account for her. Explain to her what interest is and that money earns more money. As more money comes in and depending on the age of the child, you can build upon it – a fixed deposit, a recurring deposit. This will provide your child with a wealth of practical knowledge in a controlled setting.
Delayed Gratification.
Remember the Marshmallow experiment? It is said to be one of the most famous pieces of social-science research: If the child can go 15 minutes without eating the marshmallow in front of her, she will get another one. Whether she’s patient enough to double her payout is supposedly indicative of a willpower that will pay dividends down the line.
I do a variation of sorts by offering to double the reward if my son delays his purchase of a toy or a chocolate. I have noticed that kids look for immediate gratification. But I have also noted that the message eventually hits home. The experiment is fruitful and will go a long way in helping them curb impulse buys in the future.
Ownership.
Children also want to spend. Fair enough. This is a great time to show them that stuff costs money. And what they want comes at a price.
Take it one step further and teach them about the concept of appreciating and depreciating assets. Electronics and toys are depreciating assets whose value falls down day after day. On the other hand, gold, silver and money in a savings accounts are appreciating assets which increase in value with time. Every time money is spent, make them aware of the kind of assets they are buying.
Income.
Explain to them how parents go to work or run a business to earn money. That is active income. Even the house help avails of an active income. Rent from another house or interest earned on the bank account or fixed deposit is passive income.
You can introduce them to equity investing too. Ask them to look at which company manufactures the items which are in daily use. Let them figure out who is the manufacturer behind the brands – be it clothes, underwear, cars or motorcycles; start with whatever it is that strikes their fancy.
Why bother?
On a lighter note, it is engaging. Their questions, responses and views will ensure its lots of fun too.
More pertinently, it is educational. You would have given them a head start of at least a decade or two in financial matters, and a level of confidence that many lack when it comes to finances. Compare that with most of us who started investing only after we got our first job.
Remember, if you don't lay a good foundation and teach them the value of savings at a young age, they will fall prey to what their peers are doing. Now that is something worth avoiding.
Shagun Jain blogs at Liberated Soul and tweets at @liberatedsoul3. He has also authored: