Understanding the limitations of money or excessive unrealistic spending urges can be very difficult for a young child to understand. As a parent it is always wise to teach your children the importance of money and how to manage it at a very early age. As they grow older it becomes a disciplined skill that will allow them to become responsible adults when making financial decisions.
“As with learning something new, there are always gaps in your understanding of the topic that need to be learnt. As such children need to be taught so that they can understand the value of effectively managing money,” says Michael Daniels, Head of Deposits & Payments at Standard Bank.
“No parent likes to say no all of the time, especially if they can afford to buy the items their children ask for. However, it is never too early to begin building a solid future based on an appreciation of how money can grow and the value of money management. It all begins with the basics,” says Mr Daniels.
Here are a few ideas to help you manage the demands of your kids while helping them understand the value of money:
Teach the basic of budgeting
Let your children know that you love them and want what’s best for them but they need to understand that there is not a limitless supply of money.
A good way to demonstrate this is to get monopoly money and demonstrate that you earn X (it does not have to be the real amount) and the things that you need to spend the money on include school fees, groceries, and a bond or rent. It will quickly become apparent that money does actually run out and that necessities need to be budgeted for on a monthly basis. The basics on budgeting could also be taught with a small amount of pocket money. The child can then be challenged to decide how best to spend the money on toys, pet food, giving to the needy or a neighbour, movies, own airtime, etc. Use this to show that money is finite and needs careful planning called budgeting.
Encouraging to save for a goal
We have to remember that money is in itself not aspirational, but rather a mechanism through which goals or needs can be met. Giving your child everything they ask for when they are young, can create unrealistic expectations when they are older.
Encouraging a child to save for what they want is an extremely valuable life skill as it teaches them that effort and discipline equal reward. It is important for a child to understand that they can only have control over their money and wealth if they have a clear goal.
The goal need not be big; the trick is to keep it simple and realistic. Saving for inexpensive items is easier and they can be saved for within a few weeks, which keeps the task interesting and exciting. Having a piggy bank or if your child is old enough, a savings account with a bank, will encourage your child to save regularly for their identified goal. They will soon see the merit of saving and feel a sense of accomplishment when they realise that it was their own efforts that got them the rewards.
Chores and rewards
One of the best ways to get your child to appreciate the value of money is to get them to earn some themselves. Encourage your child to get a part-time or holiday job. If a child is small, you could look at putting a set money value on small jobs or tasks around the house. A child then begins assigning a value to acquiring things and balancing the need for an item against the hours that need to be invested to achieve the objective.
Benefits of a bank account
This can be a very exciting milestone in growing up and introduces a child to electronic banking, the benefits of money management and how to use a debit card. It is all about control, access, accountability as well as how to manage your money through various banking channels like Internet Banking or ATMs.
Making money grow
Teach your child the magic of compound interest – the beauty of money is that when it is left alone, it grows steadily and you earn interest on interest.
Learning to put a defined sum away at the beginning of a month, rather than trying to save what is left at the end of the month, is a key to financial independence. A savings account is more effective for older children as they are able to understand what it is all about it.
You could consider rewarding your child for reaching their savings target and letting their money grow. This could be in the form of an agreed treat or outing.
Good planning skills as early as possible
Teach your child to plan how they want to buy something if they earn pocket money. They can borrow now from you and pay back from pocket money with interest, showing the full repayment as much more than the value. They could also save the pocket money and delay buying something, until they have enough and do not need to borrow. They would then see that the purchase price is equal to the hard earned savings.
“Remember, the objective is helping your child grow up with money and having an understanding of how it can be controlled and used to the best advantage. Children who have learned the basic disciplines involved are more likely to become young adults who understand money, manage it correctly and handle it effectively,” concludes Mr Daniels.