A few months ago, I had written an article in this blog titled "Children & Money – Can We Teach Our Kids about Finance & Money Early?" about educating our children about finances. It is always a good idea to start financial education early. Home is the first place where kids learn about finance and as parents it is our duty to teach our kid the important aspects. The starting point of financial education for any child is “Pocket Money”. In the Indian tradition, whenever kids take the blessings of adults during auspicious occasions like festivals, the most common way of showing love or blessing is by giving children cash. This article is not going to cover that aspect. We are only going to talk about the regular pocket money that we as parents will be giving our kids…
Before we begin – During Festivals and auspicious occasions, kids usually collect at least a few hundred rupees when they get the blessings of elders. It would be a good idea to buy fancy piggy banks to the kids and motivate them to deposit that money into the piggy bank. For a child that hasn’t reached at least 15 years of age they do not have the know-how to spend that kind of money. So, the best option for the child is to save that money. As a Parent we must not touch the child’s savings. Make sure you open a bank account in the child’s name and deposit this money periodically into that account. DO NOT touch that money. It is the kid’s hard earned money not yours!!!
Ok, coming back to the topic of “Pocket Money”, this not only does pocket money give kids their much needed financial independence, it also offers us our first and probably the best chance to teach them the value of money. Below are some suggestions about this extremely important topic.
Step 1: Decide When to Start
Deciding when to start giving a kid his/her pocket money is the first step. Do not give money into the kid’s hands when it does not know how to differentiate between the different currency note or coins. This usually happens when the kid is around 7 to 8 years of age. So, wait until your kid is around 8 or so in age and then start giving the pocket allowance.
If you feel your kid is not ready to handle the money you have all the right to delay the start of this pocket money thing. Just because your child is 8 years old doesn’t mean he needs cash. Be a responsible adult and take a wise decision. Do not be in a hurry to hand out cash to your kid.
Step2: Fixing the Allowance
Young children almost always spend their pocket money buying candies or items to eat on their way to or from school. As they grow older their needs and interests vary and their spending pattern too will vary. So, as parents we must fix the allowance that wouldn’t be too much to spoil the kid but at the same time not too little to make him uncomfortable.
Example Age-Wise Split:
a. Less than 8 years
b. 9 to 12 years
c. 13 to 15 years
d. 15 to 18 years
e. More than 18 years
Just like at work where people are given mandatory promotions at the end of a certain number of years, it is extremely vital that you give them mandatory increase in pocket money when they move over from one age group to another.
Step 3: Fix the Frequency
Another important consideration is how frequently you are going to give the allowance to your child. Younger children usually spend all their allowance within one or two days of getting their hands on the cash. So, it would be advisable to start out with smaller amounts and higher frequency like Weekly. As they grow older and learn to handle their finances well, you can reduce the frequency to say once in two weeks or monthly.
Decide the Frequency and Amount sensibly. Kids these days grow up in Apartment’s and gated communities where there are multiple kids of the same age group. So, talk to the kids of the other parents and find out how much they are offering as allowance. Make sure to keep your number as close as possible to the general average. If the average is Rs. 200/- per month for the kids in the 10 to 12 year age group in your colony, you can decide to keep your number at say Rs. 50 or 60 per week. You need to also ensure that you don’t give them too much cash to flaunt. Flaunting cash is not a good habit and may be a hindrance in the child’s future as well.
Step 4 – Monitor the Spending’s
The whole idea or purpose behind giving the kid an allowance is to provide them with financial freedom so that they can hone their skills at handling money. Don’t be a micro-manager. Let the kid decide what or how they want to spend their money. Your job is to set the ground rules like the Do’s and Don’ts. Once you establish the ground rules don’t trouble them excessive questions or pointers. Kids are bound to make mistakes. Don’t punish them for that. Instead teach them what they did wrong and help them understand the right way of doing things.
Financial Freedom does not mean uncontrolled or unmonitored spending’s. Make sure that you know what your kid is doing with the money you give them. It is extremely vital and important to ensure that your kid is not indulging in bad habits like gambling or drugs or cigarettes etc. The list of bad habits that are tempting to the adolescent youngster is endless. As parents it is our bound duty to do what is best for our child. So, never lose track of what your kid is doing…
Step 5 – Do Not Bail Them Out Financially Unless it is Extremely Essential
As I said before, kids will make mistakes. After all, even grownups make wrong choices when it comes to finances. So, we need to realize that during the first few months of their new found allowance kids will lose money or spend it on things they don’t need or exhaust their allowance within the first couple of days in the week etc. At such times, don’t bail him out. For ex: If your kid’s weekly allowance is 25 rupees and he treated himself to a cornetto and spent 20 of the 25 rupees on day one and has almost nothing to spend for the remaining 6 days of the week. So, he may come back to you for additional cash. As parents it may be hard to see our kid suffer financially but if you bail him out and refill the additional 20 rupees today, he will never learn to be responsible and be a spend-thrift throughout his life. Let him spend the next 6 days on the 5 rupees he has at hand, the next week onwards he will think and plan his spends so that the money you give him will last the whole week…
On the other hand let us say he lost his money somewhere on the way back home and is stuck and calls you for help, it is your duty to go and bail your son out because he did not do it on purpose. Even adults lose their money once in a while and kids may do it even frequently. If you help him out, make sure to give him some tips on keeping his allowance safely. It will help him be more cautious the next time around.
Dads are usually stringent when it comes to money matters. It is the Mom who is the “AkshayaPatra” for kids. I have done it, you have done it and in all probabilities our kids will do to. But, have a frank talk with your wife about the topic of money. Ask her to take a judgment call about handing out cash to the kid. Let the kid not sweet talk her into giving him additional money regularly. Though mom’s are always sweet and eventually give-in more often than dad’s they must also learn to say No. At least during the first few years of the child’s financial education.
Some Additional Tips:
The following are some additional tips to help you handle your kid’s financial education:
Tip 1: Don’t offer money to kids for doing house-hold work like Cleaning up the Garden or Terrace or Visiting the Grocery store etc. Those are duties of every individual households and not money making opportunities.
Why: Offering cash rewards every time your kid does something for the house will set a bad example and the child may start expecting to be compensated for every minor errand he/she may do. This is not correct. They are part of the family and should not be doing stuff for money
Tip 2: Don’t punish them for bad behavior by cutting on the allowance. Find other means to discipline them.
Why: Good Behavior is something every child needs – irrespective of the allowance they get. If you cut their allowance because they misbehaved, they may mend their ways just for the money involved. Do you really want your kid to be well-mannered just in front of you so that he will get his full allowance and misbehave with everyone else? This is what will happen if you touch their allowance to punish them. There will be little or no behavioral improvement.
Tip 3: Don’t interfere in borrowing or lending among friends
Why: Teenagers borrow and lend money frequently and it is extremely common. So, as parents we need not involve in all those matters. But, as a general suggestion we can advise our kid against the pitfalls of excessive lending or excessive debt so that they can be cautious.
Tip 4: Teach Kids the Habit of Saving – Give him a Piggy Bank and if possible a Bank Account
Why: The first paragraph in this article about kids getting money from elders is very true in India and I am sure you will agree to it. Let us say it is Diwali and your son gets to meet both his grandparents, all of his uncles, aunts etc. and goes on a “Bless Me Please” spree, he will probably collect at least a few hundred rupees or maybe even a four digit number. In such cases, teach your kid not to go on a shopping or spending spree with his new found wealth. Teach him the importance of saving for the rainy day. Tell him to start saving this money for something he has been asking you for a while; say a new Bike or a new Cricket Bat etc.
If he child realizes that spending money is easy and saving it is difficult, he will not take irresponsible financial decisions in his future.
Some Last Words:
The whole purpose of this article is to cultivate financial discipline and wisdom among kids right from a very young age. Almost all of us these days are in the “Working Class” and we have had to work our backsides off to come to the stage we are in right now. As parents it is an admirable trait to think that, I do not want my son or daughter to go through the financial hardships that I had to go through when I was young. But, if you spoil your kids for choice, they will not realize the value of hard work or money. Do we really want our kids to become that typical rich brat who causes trouble in random places and gets beat up by the hero in movies? You will definitely say that, the guy’s wealth and access to easy money is the reason why he is so spoilt. I am sure you don’t want that to happen to your kid, do you???
Be a responsible parent and teach the good things to your child.
Happy Financially Educating the Next Generation!!!