In my last article on kids & Money we saw that it is very important to teach our kids about money. We also saw that financial education that we need to give our kids can be divided into two parts : 1) Practical Aspect of Money. 2) Philosophical Aspect of Money. Now let us see both the aspects in detail one by one.
1) Practical Aspects of Money: This includes practical aspects like Income, expenses, assets, Liabilities, investment, banking, insurance etc. For kids from the age of 2 years start observing money transactions but they don’t understand much. According to my experience I would recommend to start discussion of small money transactions with your kids form the age of 5. The discussion should be very basic and not very complicated and parents should try to simplify the topics. Particularly I have observed that when our kids watch us doing some financial transactions or whenever some discussion on any financial matters is going on and they want to participate in it we generally stop them by saying that “you will not understand this”, this approach should be changed.
Which practical aspects shall we teach our kids?
While educating kids about money matters we have to be careful about which topics shall we discuss with our kids. So according to my understanding and experience we shall discuss following topics.
a) Income : we shall discuss with kids about – What is Income?, difference between income from different sources like income earned from active efforts like salary income, business income, professional income vs. Income earned from passive sources like rental income, dividend income, interest income. How to built sources of passive income? While discussing these topics kindly remember that your kids may understand hardly 10% to 20% of what we tell them but this will definitely puts some seeds in their minds to think. Also you will have to discuss these topics again and again with your kids to make them understand.
b) Expenses – developing good spending habits: Another most important topic is to discuss about spending habits. Expenses can be classified in four categories Expenses for Basic needs, Comfort needs, Luxury needs & expenses which don’t fall in any of these can be classified in waste of money. We need to develop an approach of being not too conservative or too aggressive in spending within our kids. Also we need to develop an approach to do cost benefit analysis and find value for money while taking their spending decisions. I generally try to involve my son in all minor to major spending decision like starting from buying vegetables to decisions like car & house and try to give him different options and understand which option he prefers with reasoning. Like if I have to buy a car I try to involve my son by giving him different options and prices and ask him his opinion with reasoning. Kindly remember that while kids give their views we need to respect their views and don’t criticize or reject their views straight way. But at the same time we need to give them our views with reasoning and this should be a positive discussion. If we straight way reject or criticize their views they will stop participating. This method will help in developing their analytical skills while taking any financial decisions in life.
c) Savings & Investments: After income & expenses, kids need to understand about savings & investment. Savings is what is left out from income after spending and investment is when you invest that saving in a planned manner for some future goal in an investment instrument. Here we need to develop an understanding about saving money and then investing it. This can be done by first making kids earning small income through some small tasks like car washing or you can also motivate your kids to do small projects like stall in their school funfair to earn profit. Once they have earned some sort of income then help them to manage their expenses. Try to develop a habit to write their income as well as income in some diary or excel sheet if they are comfortable. Now whatever they have saved has to be invested in any instrument. First help them to start a saving account and understand transactions in that and after that explain them different instruments like fixed deposit, shares, mutual funds etc. help them to choose the one. Kindly note that don’t push your decisions on kids, let them take their own decisions and see what happens in future. This entire activity will develop a habit in kids to understand relationship between income, expenses, savings and investment and most importantly plan their money matters when they will grow up and become adults.
d) Assets, Liabilities & Net worth: Another important aspect about money matters is educating kids about Assets & Liabilities. Assets are created from savings & investments. Kids should be educated about different types of financial & Physical assets. They should also be given understanding about depreciating assets like car and appreciating assets like property and investments.
Similarly, basic understanding about liabilities should also be given. Which liabilities are good and which are bad should also be explained to them.
Excess of Assets over Liabilities is Net worth and this is the most important figure in ones financial matters. Whatever financial decisions we take has some impact on our net worth. Increase or decrease in net worth will represent our overall financial health and we should try to give our kids this idea of focussing on effect on net worth while taking any financial decisions.
Above are few basic practical aspects of money which one should teach his kids. Following two aspects should be kept in mind while your discuss money matters with your kids.
Let your kids make some mistakes: with all above understanding it is important to give them small experiences to deal with financial matters and allow them to take few small decisions. Also they will make some mistakes and will suffer some losses due to wrong decisions but allow them to do what they want to do. This will improve their decision making.
Also it is very important that they make mistakes at smaller level so that when they have to take bigger financial decisions in their life they will have experience of small mistakes. Try to develop an approach of analysing and learning from the mistakes.
Develop a reasonable risk taking & loss bearing psychological ability: In practical life we all know that many times we have to take financial decisions in our profession or business which may or may not go the way we want but at those times we need to analyse different aspects and take appropriate decisions and after that if that doesn’t go right we have to be ready to make necessary changes. But from my experience I have observed that many parents don’t involve kids in any financial decisions. Even I have seen that they try to take their decisions even after they start earning. This approach as a parent makes our children poor decision makers and they suffer from the lack of confidence while taking financial decisions with fear of going their decisions wrong. But we if involve them in decisions at early stages and develop proper analytical and decision making skills, they will be able to built reasonable confidence in financial decisions and this will help them throughout their life.
In this article I have discussed all the practical aspects which will be useful in day to day life and in next article I will discuss the philosophical aspect of money which we should consider for our kids.