Warren Buffet started buying stocks at the age of 8 andlater went on to become a multimillionaire through his equity investment and has now been on the Forbes list as one of the richest men in the world for a long period of time. The fact that he has never been ranked below No. 3 on the Forbes list is a rare feat for anybody to achieve. Yet, he feels that he should have started earlier! Can we hone the next Warren Buffet in our own homes? Yes, we can! Rather we should by teaching financial planning at an early age.
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The well-being of the child is the first inclination of any parent. But in this capitalist society, by adding fiscal education, this well-being can address the money-related fear and greed psychosis in the minds of the new generation and a sound mental make-up can be added along with the healthy physical upbringing of our kids.
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Children today handle more money than parents are aware of, that too, at a very early age. In fact, it may come as a surprise to know that despite good parental supervision, the persuasive “pester power” of kids often influences the family budget. Psychologically, kids have more power on the parent regarding spending than anything else. So it has become very important and crucial to teach our kids the value of money. Teaching financial planning to your little moppets on time and with their growing years will make them more money savvy and instil self-confidence in financial transactions.
Financial planning for age group 8-21 years
Mr and Mrs Deshpande shop and dine at a mall at least once a month with their young children Saee, 8, and Rutvij, 11. There are no sullen faces or tantrums from these children.They come home perfectly happy with their respective shopping bags. How did the Deshpandes manage such good behaviour? Not every family can claim this like the Deshpandes. Especially when the most common stories we hear are of parents being forced to give in to kids’ demands. The Deshpandes possibly may have been discussing money management with their children from a very early age. And more importantly, they themselves may be disciplined role models. In fact it is easier to establish clear guidelines about money at a very early stage than battle behaviour problems later. Research shows that children are logical creatures and have clear thinking and can easily understand basic concepts like saving, budgeting and comparison shopping. A parent can introduce children to basic money management with these simple tips:
It is never too late to discuss about money. And don’t hesitate even if you have been or are a bad money manager yourself. In fact it is doubly important that you teach your children the right way.
Engage in dialogue.
Allow them to count notes in your wallet and loitering change in cupboards, purses or their piggy bank. Don’t shut them up when they ask about ATM cards, debit cards or credit cards. Discuss day-to-day expenses, salaries, cash and bank accounts. Ask them to write down expenses and do basic addition calculations.
Give them pocket money and freedom to spend, but don’t give up all control. But also give them a diary to maintain an account of pocket money expenses. Before doling out next month’s pocket money, check the expense account or ask them what they spent their money on.
Systematic usage: Let them know that spending is not the only criterion for pocket money. Talk to them about earning, saving and giving as well. Teach them to allocate pocket money across various heads so that you set them on their way to becoming financially responsible adults.
Set goals: The best way to teach the value of money is to set financial goals. The idea of saving is to achieve a dream goal. For example,
Set an example: Kids watch their parents very closely and they can pick up wrong messages more quickly than the good ones. If either of the parents is a compulsive buyer, then your child will also want something on a shopping trip to the nearby mall too. These seven tips above can make the task easier for parents. But there are still more specific things you can do to teach them the value of money or about smart spending and saving habits:
Saving Lesson: Saving in small piggy banks or children’s saving account. Explain how interest is calculated and how money grows. Go with your kid to deposit gift money or residual pocket money if any.
Spending Lesson: Children should be taught how to budget outings Consumption Lesson: Give your child any old mobile phone, but the monthly telephone bill has to be footed from pocket money. Go walking to classes and use rickshaw money to buy goodies.
Value for Money Lesson: How homemade pizzas or cupcakes are more creative and cost less, while being tastier and nutritious.
Fiscal Discipline and Education
For a better understanding, we divide children into three broad categories by age:
Technically, financial experts recommend that parents start talking about money as soon as the child can start counting, which usually is around 5-6 years of age. From the age of 7, you can ask them to run your child can save gift money from relatives and friends towards a coveted bike or a designer dress or outings with friends. Set budgets: Let it be very clear at all times that there are limits on the money they get to spend whether on a birthday party, a new dress, a new electronic gadget or a bicycle. Tell them how much they will or will not spend and don’t go back on your word, even if they sulk. with friends, birthday parties, the price of return gifts, fries, cold drinks, etc. Giving Lesson: Giving up pocket money once in a while for needy street children for education, cases like natural disasters or any other worthy cause. Spending value time with grandparents or at homes for the aged, giving food to the poor and needy, donating the previous year’s books to tribal schools. errands and pay them appropriately for non-regular tasks or indulge them with extra pocket money.
At this age, expose your kids to the practical aspect of money or actual money dealings. One father on the 1st of every month asks his 12-yearold daughter to make envelopes for monthly bills payable and asks his son aged 14 to write out cheques for utility bills, and credit card or debit card expenses. He and his kids also maintain the monthly outgoings file together to enable them to understand expenses under various heads. The children were clearly able to see how much money went out and where. Handling of money: Send your child once in a while to withdraw cash from the bank account. Show them how interest is added on residual money in account. This is the age to show them the power of interest and the power of compounding. When the Khanna family children wanted new table-tennis bats, they encouraged their kids to make Diwali cards, coasters, and paperweights at home for sale to meet the expense of Rs 750 and all got sold for Rs 3,000! In this process, Mrs Khanna says, the children learnt what it takes to work hard and earn money. Also, as one child counsellor warns, “Kids of this age category may get manipulative if you always value behaviour in terms of gifts or money!” So be careful about overindulging children with money rewards for every chore done. Value buying: When a child asks something, let her or him first find out what it costs and come up with cheaper alternatives. Planning expenses: This is the age when kids must understand that pocket money is not just about rights but responsibilities. They have to make their allowance stretch till the end of the month, so be strict. If they spend it all in the first week, don’t weaken when they ask, “Just Rs 50, daddy, just this once”. Ask them instead to ‘plan’ better.
By the age of 16, children can manage monthly expenditure quite effectively. If so, you can give them more freedom but also keep up the Earning power: In some societies, the child is likely to have discovered summer jobs by now. Encourage the child to be transparent about the money s/he earns. Let them buy stuff for the home and their siblings rather than spending it all on themselves. Not only will it make them feel important, but it’s a valuable lesson in sharing. Ensure that they save for an uncertain future or volatile economic times. Discuss plans for their higher education and their idea of funding these plans. Veer them towards students’ loans and scholarships and make them offer to repay you once they start earning. Family finances: By now, the child is old enough to handle banking chores. One local shopkeeper, Mr Shah, would hand over to his teenage son the entire cash to be deposited in a co-operative bank which used to be open at 7.00 pm. The logic of Mr Shah being that if he could learn to handle cash now, he will effectively handle cash all his life. Let them participate in family financial discussions like which car to buy, how to save or cut expenses to afford it, and how the loan will work. When they do your shopping,make sure you teach your children to pick value deals, maximize freebie offers and to compare brands.
Investment options: This is the time to explain the concept of insurance to your kids. Also discuss where important family financial documents are kept. Financial planners are unanimous in their opinion that this is the best time to introduce investments and by 20,a child must know enough about investing. Teach them about saving accounts and current accounts and how interest and recurring deposits work. Teach them about Bank Fixed Deposits (FDs), Company FDs, Public Provident Fund (PPF), compounding interest calculations in PPF and Employee Provident Funds (EPF). Gaurav Mashruwala, a renowned financial planner, bought his first stock in his first year of college!
Life lessons What children are taught in childhood stays with them for life. Even though you involve your child in family finances, there is a fine line between making children aware and not making them too preoccupied with money. It should not happen that they carry financial worries like grown-ups and lead an anxious teenage life instead of a fun-filled life. Also, keep this entire matter practical or the child may become obsessed about saving money or completely preoccupied about making it grow which, in either case, is not a very healthy sign, too! Finally, every parent must equip his or her child to be savvy about money and to understand the important lesson that money is not an end in itself, but only a means to achieve dreams, desires and financial goals.
Suchita Ambardekar is a Mumbai-based financial planner and investment consultant with 10 years of experience under her belt. Through her company TecWealth (www.tecwealth.com), Suchita has helped over 350 corporate and individual clients manage their finances and pave the way for a brighter future.