Teaching your child to 'save'... build the habit!
One has to be more innovative and inclusive than what our parents were when we were kids (not that I have grown up). Our parents also had a limited understanding (barring a few parents I knew).
So, what could one do beyond the piggy bank thingi. To answer this one must remember that there are five important components of wealth creation, and that savings is just one part, and undoubtedly not the only part that should be developed as a habit lest we want to build super-conservative wealth-creators.
The 5 things are...
a) expense management,
d) debt management, and
e) risk management.
As a primary-grader, points (d) & (e) are not required to be practised. As a secondary-grader, point (d) may be introduced in the curriculum, and point (e) may be restricted to an academic expression.
The Three Most Important Things
Simple exercises could be created to ensure that children learn this art. To begin with lets start with the three most important tools that are required...
A. A Piggy Bank
- Break-to-Open variety, and
- Lock-n-Key variety
B. A Bank Account & a Mutual Fund SIP Folio
Depending upon how old the child is, one may introduce...
- A PPF Account
- A Mutual Fund Investment Folio
- A Recurring Deposit Account
C. An accounting notebook
How to do it...
- Explain the child that s/he will get money from the parents account every month.
- One could earn more if one helps in doing certain jobs at home (usually a dad-daughter or mother-son contract)
B. Goal Identification
Help the child to identify a goal over a short horizon (1yr) and one on a longish horizon (three years... may not be easily understood for some children and at certain ages).
C. Saving Practices
- The child has to decide how much money goes into the 'Break-to-Open' Piggy Bank - This is the exigent fund.
- The child has to decide how much money goes into the 'Lock-n-Key' Piggy Bank - This is the contingency fund which may only be opened by the 'custodian' on request (mother/father), and is to take care of some out-of-the-blue expenses. The money taken from here needs to be treated as a loan (without interest), and has to be returned on a pre-fixed date.
- Help the child decide how much is s/he going to save out of the 'income' money on a monthly basis. This money should be kept with the local custodian for investment (refer to point 4 below)
D. Expense Practices
All expenses (daily expenses such as lunch money et al, and occasional expenses such as a gift for a friend's birthday) would be made from this money.
The child needs to maintain a daily account of expenses. Don't pound the child with a heavy ledger, but create a simple one in a notebook. Don't do it on the computer rightaway. Let the habit build, and then one can migrate to using a computer based money management xl sheet. One needs to do it in a notebook as that helps build the daily practice, and the child lives the moment. Computers allow convenient tools such as drag-n-drop and cut-copy-paste, but these are not advisable when it comes to building a habit.
- Help the child decide how much money the child will expend on a daily basis (parents' consultative skills need to be at play here. Fix up a moderately stretched target). If the child is not engaged in the 'daily-expense' mode, then you could skip this.
- Help the child decide the monthly expenses for events such as birthday gifts, family going-outs, school excursions etc.
E. Investment Practices
The money saved needs to be allocated as per the goals identified. The money saved can be put into broadly 3 buckets.
a) Money saved out of 'good' expense management (Net of expenses made in points 4a and 4b.)
b) Money saved out of 'good' saving practices (Point 3c)
I suggest that parents take a break in this planning activity after discussing Point 4 for the first time with the child. This would give the parents an opportunity to think through whether the goals are a possibility or not. Remember, that the child needs to taste success, otherwise the interest would be lost, and the practice would never get nurtured into a habit.
Once calibrated, in the second dinner-table meeting re-look at goals and calibrate expense, savings, and income, with your child. Call for decisions accordingly.
> For money saved out of Point 5a, put the money in the bank account and once in a quarter shift the money to a lumpsum investment in a mutual fund.
> For money saved out of Point 5b, put this money in an equity-based Mutual Fund through the SIP folio. Let it get deducted directly from the 'income' source.
- Involve the child in updating the passbook from the bank. Don't do the internet accounting way. By visiting the bank you would ensure that the child understands albeit unconsciously about the various things that happen in a bank, and moreover, this will help burn few of our calories as well. Once the passbook is updated, ask your child to go ahead and update one's own accounting notebook.
- Let the child see the Mutual Fund statements and highlight the growth in the fund that is happening, and how it would help the goals get nearer. Ask your child to go ahead and update one's own accounting notebook.
- Review the balances in the contingent and exigent fund balances as per the child's accounting notebook. The contingent fund should steadily move to a limit of 3 month's expense, and the exigent fund should move to a limit of 1 month's expense. When it comes to adults, the exigent fund needs to be kept safely at home to be used in case of an emergency, and the contingent fund should be kept in a financial instrument that is highly liquid.
Its important that the child knows that it is rewarding to invest, and hence, go ahead and celebrate and treat your child to a thing s/he fancies... maybe a chocolate or candybar or an ice cream; whatever it be, it shows that you recognise and acknowledge the good practices.
All this is not possible unless you and me save and invest prudently. So, the question is do we do all of the above. Is it a habit with us or we keep the conversation restricted to an over-the-drink-intellectual-conversation.