Financial Grooming of Children

Most of us have grown in an environment where money matters were generally not discussed in presence of children. We generally treat this subject as non-essential and leave kids to discover the related issues on their own. Parents consider it their duty to provide for all needs of their children. However, mostly children fail to realize the compromises and complexities involved in making the provisioning look smooth. When the children grow up, they carry along with them the financial habits developed by default. They also find it difficult to manage their finances the way their parents did it for them. For the sake of their well-being, it is extremely important that we do the financial grooming of children in a calibrated manner. 

Money is a Finite Resource

In my opinion, the first thing that kids should be made to realize is that money is not infinite. Whatever is available, must be spent judiciously. One way I found to be effective is to let them make their own choices to spend from a defined amount. It is not simple to ask them to pick one toy costing a particular amount from a toy shop, but making them exercise discretion in spending on different occasions will drive home the point.

Clubbed with that is the favorite childhood habit of putting all money received from various sources in a Piggy Bank. Making them count their own money regularly will also teach them accounting in some form. They should be able to see how their money increases by saving, giving them more and better options to spend, and at the same time how it decreases fast when we spend it. The age bracket for this part can be from 5-10 yrs.

Create the Infrastructure for Them

RBI has recently taken several initiatives to increase financial awareness amongst children. One significant tool towards this is to open their savings account which can be opened at any age. Minors above 10 yrs of age can even operate their accounts independently. After opening the account we can transfer the money from the Piggy Bank. Children can use a debit card associated with their account to carry out financial transactions. It is also advisable to make their Aadhar and PAN cards at the earliest. It is important to have the necessary infrastructure to be in place so that they are Organized for Investing by the time they start earning on their own.

Let them Budget their Pocket Money

With the requisite infrastructure in place, we can gradually transfer the control of their accumulated savings. We also need to budget their lifestyle so that they do not take financial comfort for granted. Even if parents are enjoying a healthy financial state, careless lavishness towards children might give them all the wrong lessons for life. However, it is also necessary to avoid extremes on both sides. I have seen some parents being so rigid and strict with their children that they remain psychologically perplexed till late in life. We should not confuse subtle financial grooming of children with strict disciplining.

Invest for them as they grow

A major concern for all parents is to fund children’s education and marriage. We can invest the amount earmarked for this purpose in the name of the children. Over time when they see the growth of these funds, they might be able to understand the concept and necessity of savings and investment in their life for their own future financial objectives. They can also understand the Time Value of Money and the interplay between growth and inflation. Towards the later part, a little bit of exposure to equity may highlight the correlation between Risk and Return.

Teach Financial Planning

At times children wish for some costly things. Even if we can afford such demands, we can defer the expense for some time to teach them some financial planning. We can ask children to save some portion of their pocket money. And as a motivation we can give some incentive like equal amount of additional pocket money. Let them calculate the savings required to meet the financial objective. During this period there will be other desires cropping up and the child can learn how to prioritize and exercise restraint to reach their goal. This might also help in curbing the habit of impulsive buying. 

Take Taxation Benefits while they Learn

Parents also have a significant financial benefit in this entire process of financial grooming of children. One small benefit is additional tax rebate on interest up to Rs 1500/- in a minor’s savings account. Another good avenue is the PPF account wherein contributions up to Rs 1.5 lakhs can be made each year and the returns are Tax-free. The children become independent Tax Identity on attaining the age of 18 yrs. This means that income from all accounts and investments in their names will thereafter be taxable to them. As most children start earning after 21 yrs of age, there is a good window when a significant amount of tax can be saved.

The investments in their name meant for their education can be redeemed with almost no tax implication and utilized for the intended purpose. The tax benefits can be enjoyed till such time the young adult starts earning a significant taxable income on their own.

Recommendations

1. Do not shy away from talking about money matters with children.
   
   
2. Gradually let children exercise more control over their savings and expenses.
   
   
3. Create the necessary infrastructure like Bank account and PAN Card to further the financial awareness and grooming process.
   
   
4. Make them prepare their own mini financial plans.
   
   
5. Save/Invest in their name and take benefit of taxation while they learn.