Savings and Investments: Catching them young

Terms like savings and investments are no longer jargons; they are instead important life skills to imbibe in your kids at an early age.

We have always heard that one should start saving and investing early in life to achieve financial goals. This idea can be achieved if our kids are well informed about its importance. Concepts of savings and investments aren’t usually taught in school. So, it is on parents to introduce them to their kids. In United States of America, National Teach Children to Save Day is celebrated each year in April. This program is sponsored by American Bankers Association and has been helping young people since 1997.

A study on Habit Formation and Learning in Young Children; by researchers at University of Cambridge revealed, that kid’s monetary habits are formed in their early years. It can be seen that even a child aged 4 can pick up the basic idea of saving. So why not start young? Depending on the age of the kid you can take an approach to how this life skills be incorporated. In order to inculcate basic financial knowledge, a simple 3 level approach can be followed.

Encouraging them to save: For kids between the age group of 4-7 years, the best way to make them save is with a piggybank. You can give them monetary reward on completion of a task like tiding up his/ her room, helping someone or any such chores. Tell your kid that they are putting in (saving) their money in their piggybank in order to buy a toy. Make sure the toy isn’t very expensive to avoid a future disappointment. This habit can make them learn 2 things. First, they would themselves grasp that just a penny a day gradually fills up their piggybank. Second, that they will have to wait for their piggybank to be filled in order to buy something. Once they realize that savings help them in fulfilling their wish, they would take it up as a habit.

Let them take decisions: Kids within the age group of 7- 11 years can analyze situations better. They are able to prioritize. Help them understand the difference between needs and wants. If a child wants a game in particular, ask them if its really needed? Will it be worth to spend their saving on it? Is there any other game which is equally good and can cost less? Are they getting the best deals or discounts on their desired game? You can guide them when they need help on any of these questions but make sure that they decide on their own. These questions would make them realize value of their money.

Saving v/s Investment: For kids between age of 12- 15 years their wish list is generally bigger and more affluent. There are 2 things that a kid will need to understand; one, that the value of money diminishes over a period of time (inflation) and, concept of simple interest and compound interest. The basic idea behind these 2 things can be shared. They will understand better when taught practically. Give them an example that a ₹ 50 pen will not cost the same after 5 years, it will be dearer. Thus, mere savings might not be enough and they need to grow their money. Investment can play a key role henceforth. Investment is an opportunity to earn on your earnings. So, if you tell them that if you invest every month ₹100 @ 8% (compounded annually) starting at the age 15, then, when you reach an age of 65 you will have a corpus of around ₹ 7,98,000 on an investment of just ₹ 60,000. Also, if you invest the same amount at the same rate from age 30, the at the age 65 you will have around ₹2,33,000 against the investment of ₹42,000. Thus, starting to invest early definitely has an upper hand.

It is no news that kids learn and imitate mostly from their parents. Therefore, the manner in which parents manage their own finances will lead to a child’s financial habit. A kid will realize that money is not just for spending, only if a parent set up an example. The way a parent ‘spends’, ‘share’, ‘save’ and ‘invests’ influences the kids financial behavior significantly. It is important that kids pick up a more responsible financial habit.

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