Money and Kids
Most of us focus on maximizing the interest rate (r) to achieve better returns, thinking this will lead to wealth generation. However, what we often overlook is that time (n) is even more crucial. The longer the time period, the more exponential the growth, and thus, greater wealth can be accumulated.
This is the secret to generating wealth—it’s often referred to as the eighth wonder of the world: compound interest. To fully benefit from this and make money work for you, it’s essential to start investing early.
As we know the Compounding interest formula:
The challenge, however, is that children need guidance on this concept. Who will tell them to start investing early? Parents can play a vital role in this regard.
- Just as we teach children important life values from a young age such as developing good habits, being honest, spreading happiness, and helping others.
- We should also teach them about money and finance.
- By doing so, we help their knowledge and financial skills compound over a longer period (n), setting them up for a more secure and prosperous future.
Let us discuss some ways to start teaching kids about money
Dummy Banking and Interest System
Open a dummy bank account in a home diary and tell your child that it’s their personal bank account, and you will act as the banker. Explain that any money the child deposits will be credited to this account. If they want to spend money unnecessarily, that amount will be debited from their account. At the end of each month, the closing balance will earn some interest, say at a rate of 10% per annum.
- Every month-end, sit with your child to review the account balance and calculate the interest earned.
- Depending on the child’s age, they may not fully understand how interest is calculated, but they will learn that their money is growing. By discussing debits for unnecessary expenditures, the child will start to understand the importance of avoiding impulse spending.
- This exercise will help them develop a good sense of budgeting, cash flow management, and an understanding of the banking system.
- You can start this practice as early as age six. As your child grows, encourage them to calculate the interest, additions, and subtractions themselves. It is also common for children to receive money from relatives or grandparents as blessings. This money can be treated as one of their income sources, teaching them how to manage and grow their finances responsibly.
Open a real bank and investments account
Do you know that, you can apply for Income Tax PAN even for a one-year-old. Further, you can even open a minor bank account and minor mutual fund account.
The dummy bank account concept discussed earlier can also be replicated using a real bank account, instead of keeping the money with you or in a piggy bank. You can use the real bank statement to create a simplified version in the diary that is easy for the child to understand.
Additionally, you can open a Mutual Fund account in the child’s name, which can be fully controlled by a parent. Starting a Systematic Investment Plan (SIP) in the child’s name early on can allow the money to grow for their future needs.
You may also plan multiple SIPs for different future goals, such as higher education when the child turns 18, marriage expenses, or other significant life events. This approach not only teaches children about saving and investing but also instills a sense of financial planning for specific goals.
Occasionally, plan a visit to the bank with your child to show them how a bank operates. Take them to an ATM, withdraw some money, and demonstrate how it works.
Use this opportunity to talk about the importance of security. Explain to them that they should never share any passwords or PINs with anyone, not even friends, as these are highly confidential.
