A Sense for Money
As adults, we know it is important to teach our children the values we hold dear. Whether it is respect for ourselves and others, helping those in need or the value of sharing, we want to instill in our children a good sense for what is right and wrong.
Many of us practice some daily form of basic financial education with our children without consciously realizing it, whether it is the refusal to buy another toy for a child when they already have enough or giving a child a small sum of money for a special occasion.
Some form of financial education, even by way of loose association, is taking place. But if money management and personal finance is a life skill we want to impart to our children, what do we teach them if we ourselves are trying to make sense of a world of complex financial instruments, changing life needs and wants and economic circumstances out of our control?
The key is going back to the basics. Children do well with simple, clear concepts that are transmitted in an easy-to-understand way, and imparting lessons on the value of money is no different. Children in general come to experience money in one form or another when they start school. While they may understand money is a medium for acquiring goods, they may not understand its origin.
This is a good place to start. Getting a child to understand that money does not emerge from a machine in the wall whenever it is required is the first step to creating an understanding of its basic value. Explaining to the child how money got to the ATM in the first place and how parents go to work every day will bring home the fact that money is finite and comes with hard work.
The second lesson is not spending more than you have. It’s a basic principle that builds the foundation for spending less than you earn, the cornerstone to wealth accumulation. Regardless of the amount of pocket money a child receives, teaching the importance of only spending what he or she has for that day is the start of creating a sense of responsibility and reality. With this, the basic lesson of need versus want is being imparted to the child.
A third lesson, the concept of saving, arises naturally. When you spend less than what you’re given, you have leftovers and this can be saved and put toward a future purchase. With this, the child is on the way to learning about saving and “working” toward a goal he or she has in mind. These are the rudiments of money management and personal financial planning imparted to a child.
One can also teach money management by setting simple, clear guidelines for a child to follow. Some parents adopt the One-Third Principle with their children when it comes pocket money: Save one-third, spend one-third and donate one-third. That way, children also learn about sharing wealth alongside savings and spending within their means.
With this as a basic platform for managing finances, other financial concepts such as interest on savings (when the child saves toward a goal, the parent can be supportive by offering to top up with an additional amount), debt management (when the child spends more than his allowance and asks for extra, do you hand out more without hesitation or can you provide a “loan” of sorts or negotiate an exchange or trade for the extra your child requires?) and longer-term financial planning tools like insurance as the child gets older (as a form for savings toward a university education), to name just a few.
While there is no shortage of creative ways to teach children about personal finance, one thing is certain: Children learn the most from watching their parents, and their habits are formed from watching ours. Going back to the basics of money management is also a timely reminder for us adults of some fundamental truths about success with money.
As the world of finance becomes ever more complex and we are flooded by a myriad of financial instruments with fine print we don’t understand, there is some comfort in knowing that there are undeniable certainties in having success with one’s money: Spending less than you earn, managing your cash flow, protecting yourself from risk and understanding good and bad debt.