Introduction :
Growing up, I was fortunate to have parents and relatives who instilled in me the value of saving and equipped me with the tools to do so. Their guidance not only shaped my financial habits but also spared me from the precarious hand-to-mouth existence that many find themselves in month after month. Reflecting on this, I can’t help but feel immensely fortunate.
Yet, I also find myself pondering a perplexing question: why aren’t such fundamental life skills taught in schools? In a country like India, discussions about money are often treated as taboo subjects in educational institutions. Whether this omission is unintentional or deliberate is a matter open to debate. Perhaps it stems from a desire to foster a spending-driven economy, one that prioritizes showcasing GDP growth and economic prowess to the world.
Regardless of the reasons behind this educational gap, I’ve made a personal commitment to ensure that my child, and anyone else willing to listen, receives the financial education that our schooling system overlooks. Through this blog, I aim to share the framework that I believe is the cornerstone of a solid financial education for children.
This framework, inspired by the teachings of my grandparents, parents, and countless books on personal finance, serves as a blueprint for nurturing financial literacy from a young age. By summarizing and elucidating this framework here, my hope is that readers—parents like myself, who may have felt unequipped to tackle this subject—can adapt it to their own needs and set their children on a path towards financial empowerment. Join me as we embark on this journey to equip the next generation with the tools they need to navigate the complexities of personal finance with confidence and competence.
Step 1 : Introduce a Personalised Piggy Banks at Age 3.
At the age of 3 or so, gift your child a piggy bank that is visually appealing and engaging to them, not just what the parents prefer. Choose a piggy bank design that aligns with your child’s interests and personality, whether it’s a favorite cartoon character, animal, or vibrant color. Making the piggy bank personalized and fun will help spark their interest in saving money from an early age. This hands-on tool can serve as the foundation for teaching basic financial concepts through interactive play and setting savings goals. Starting with a piggy bank they genuinely enjoy using can make the process of learning about money management more enjoyable and impactful for young children.
To instill the habit of saving in your child, regularly give them any spare coins or small denomination notes to deposit into their piggy bank. Encourage them by explaining that once the piggy bank is full, they can use the saved money to buy something they truly desire. When your child requests a toy or item, teach them patience by suggesting they wait until the piggy bank is full to make the purchase with their own savings. Additionally, on days when your child displays exceptional behavior, reward them with a little extra money to add to their savings, reinforcing the connection between good behavior and positive outcomes. This approach not only teaches financial responsibility but also cultivates patience, delayed gratification, and the value of hard-earned money in a practical and rewarding manner.
As your child’s piggy bank starts to fill up with savings, make it a point to involve them in your regular shopping trips. When you go to the supermarket or other stores, hand the money over to your child and have them pay the merchant directly. This hands-on experience allows them to see the process of exchanging money for goods and services. Once you get home, take the time to discuss the event with your child. Help them understand that money is required to purchase the items you need, reinforcing the connection between saving, spending, and obtaining the things you want or require. This real-world practice, combined with the follow-up conversation, can solidify your child’s grasp of basic financial concepts in a meaningful, engaging way.
Make it a point that kid gets a chance to buy what ever it wants with very limited or no restrictions.
Step 2 : Introducing the ‘Co-Pay Model’: Teaching Kids Financial Responsibility Through Shared Costs at Age 5.
When your child reaches the age of 5, consider transitioning from a full-pay model to a cost-sharing approach for purchases. Whenever your child requests a toy or other item, ask them to contribute 5-10% of the cost from their piggy bank savings. This teaches them the value of money and the importance of prioritizing their spending. Reinforce the lesson by refusing to buy the item if their piggy bank is empty, encouraging them to save up for the desired purchase.
At the same time, avoid over-gifting money to your child. Instead, provide additional funds as rewards for positive behaviors, such as helping to clean their room, making their bed, or going a day without screen time. This ties financial rewards to good habits, further instilling the connection between responsible actions and financial benefits. By transitioning to a cost-sharing model and selectively rewarding desired behaviors, you can continue building your child’s financial literacy and money management skills as they grow older.
In the copay model of teaching delayed gratification to children, it is essential to emphasize the importance of delayed gratification in relation to the size of the purchase. By linking the copay percentage to the ticket size of the item they desire, children can better grasp the concept of delayed gratification. When the copay percentage increases with larger purchases, children learn that patience and saving are required for more significant rewards. This approach not only reinforces the value of self-control and discipline but also teaches children the correlation between delayed gratification and achieving more substantial goals. By adjusting the copay percentage based on the cost of the desired item, kids can develop a deeper understanding of delayed gratification and the rewards that come with patience and long-term planning.
Step 3 : Bring out the little Entrepreneur at Age 8.
Encouraging children to develop new skills and turn them into products or services they can sell is a powerful way to build their financial literacy and entrepreneurial mindset. This approach aligns with the philosophy espoused by Naval Ravikant – “Learn to Sell, Learn to Build. If you can do both, you will be unstoppable.”
Start by helping your child identify their interests and talents. Perhaps they enjoy making colorful paintings or have a knack for crafting homemade soaps. Provide them with the necessary resources and guidance to turn these hobbies into small business ventures. Teach them how to source materials, create their products, and market them to friends, family, and the local community.Leverage online resources to inspire your child and provide them with ideas.
Explore stories of other smart, young entrepreneurs who have found success through their creativity and determination. This exposure can spark their imagination and motivate them to think beyond traditional ways of earning money and save them in the piggy bank and involve in the co-pay model.
Encourage your child to experiment, learn from failures, and continuously iterate on their business ideas.By empowering your child to become a young entrepreneur, you are not only fostering their financial literacy but also instilling valuable skills such as problem-solving, critical thinking, and the ability to turn their passions into profitable ventures. This holistic approach to personal finance education can set your child up for long-term success, both financially and in their overall personal development.
Step 4 : Transitioning from Piggy Bank to Formal Banking at Age 12.
As your child’s savings in the piggy bank grow, it’s time to introduce them to the formal banking system. Open a bank account in their name and transfer the accumulated funds from the piggy bank. Take your child to the bank counter and have them personally hand over the money to the teller for deposit. This hands-on experience will help them understand the process of depositing funds into a bank account.
Explain the entries made in the passbook, showcasing the balance and any deposits made. When it’s time to make a withdrawal, repeat the process, allowing your child to interact with the teller and observe the updated balance. Emphasize the importance of this record-keeping, as it helps them track their savings.
As your child begins to deposit their savings into a formal bank account, introduce them to the concept of interest. Explain that the bank pays them a small percentage, known as interest, for keeping their money in the account. This interest is credited to their account on a regular basis, typically monthly or quarterly.Encourage your child to closely monitor the “Interest” line item in their passbook.
Explain the simple interest calculation, where the interest earned is a function of the principal amount, the interest rate, and the time period. Invite them to calculate the interest themselves, fostering a deeper understanding of how their savings can grow over time.Furthermore, discuss the bank’s perspective – how they utilize the deposited funds to generate their own revenue, and why they are willing to share a portion of that with account holders in the form of interest. This will help your child appreciate the mutually beneficial relationship between the bank and the account holder, setting the stage for more advanced financial concepts in the future.
After your child has become comfortable with the basic savings account, introduce them to more advanced banking products like recurring deposits (RDs) and fixed deposits (FDs). Explain that an RD allows them to set aside a fixed amount of money at regular intervals, typically monthly, to grow their savings systematically.Guide your child through the process of opening an RD account, emphasizing the importance of consistent contributions. Demonstrate how the interest earned on an RD is typically higher than a regular savings account, rewarding their disciplined saving habits. As the RD matures, have your child withdraw the funds and observe the total amount, including the interest earned.
Building on this experience, introduce the concept of a fixed deposit (FD). Explain that an FD allows them to deposit a lump sum of money for a predetermined period, usually ranging from a few months to several years. Highlight how FDs generally offer even higher interest rates compared to RDs, as the bank can rely on the funds being unavailable for a longer duration. Encourage your child to allocate a portion of their savings into an FD, reinforcing the idea of diversifying their financial portfolio.
By guiding your child through the transition from a basic savings account to more sophisticated banking products, you are equipping them with a comprehensive understanding of how to grow their wealth through various savings and investment strategies.
Summary :
In this blog post, we explored a comprehensive approach to teaching kids about personal finance, starting from a young age with the introduction of a piggy bank and gradually transitioning to formal banking. By involving children in real-world transactions, encouraging savings, and introducing them to banking products like recurring deposits and fixed deposits, parents can instill valuable financial literacy skills and cultivate an entrepreneurial mindset in their children. Understanding the concepts of interest, delayed gratification, and the importance of consistent saving lays a strong foundation for children to make informed financial decisions and build a secure financial future.
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Disclaimer: This blog post is intended for informational purposes only and should not be considered as financial advice. Always conduct thorough research and consult with a qualified financial professional before making investment decision.