The mother talked incessantly as she stood with the child, watching the flamingoes basking against the sun and sea. From history and habitat, to photographing with correct lighting and framing, she was teaching it all. But she was also occupying the quiet space in which the child could have picked up her own lessons. Many of us are guilty of such overbearing behaviour. If harmless birds were the subject of such intensity, what happens to an intense topic like money?
Many begin with trips to the bank. They open an account, deposit gifts and small monies, take the kids to a world populated by adults, and hope that process knowledge will help the child. The problem is the account is not the central part of the child’s money life. There is only a small amount there, and most decisions are made by parents anyway.
Asking the child to keep accounts for pocket money is nice, but boring. When parents themselves don’t make budgets or keep accounts, it is difficult to enforce it on the children. Budgets and accounting can make money decisions a chore that offers little motivation and even fewer learning points. Parents love the virtuosity in telling children to be frugal. Consistent real-life reinforcement means the family lives those principles, else values are tough to inculcate.
As the child grows older, parents enrol him or her in financial literacy programs that teach concepts about money and investing. It is tough for the child to contextualise these learnings to real life money decisions. The activities can be interesting and the lessons may hold some attention, but not very different from the science lessons that are learnt and forgotten for their actual application value.
There are three basic lessons about money that hold immense practical value in adulthood. They are the opportunity cost of money; emotional intelligence around money decisions; and the understanding that the value of money changes with time.
Consider the opportunity cost. Every rupee can be put to multiple uses. A child may not understand this if money decisions are made as if there is an insatiable amount that can be drawn from the ATM. When decisions are made by parents about what to allow and what to deny, children view them mostly from a frame of authority. Younger children may throw a tantrum, growing children may try to game the parents with guilt, and older ones may downright protest, demand or threaten if parents don’t fund their needs. That money is a limited resource is not a lesson well learned by most children, but is perhaps the most important lesson in adulthood.
It is a mistake to assume that children will learn from managing household finances. That is too complex and requires balancing too many interests over which children have no control. The simplest tool is to provide an allowance specific to the expenses of the child and the leeway to make decisions with it. Children will understand how to apportion the money between competing demands. They will also understand the emotions evoked by decisions such as giving away some of the money to a less privileged child, bearing an unfair share of expenses incurred with friends, dealing with the regret of spending impulsively and so on. Attitudes towards money are shaped by these experiences.
A more elaborate tool is to involve the child in expenses that are incurred exclusively for them. The heads of expenses that will come into this program can depend on the age of the child. A very young child might be able to manage a budget for his or her birthday party. Making the decisions around food, décor, entertainment and return gifts are valuable lessons in opportunity cost. A more intensive version of this experiment involves allocating a yearly allowance for exclusive spends, and letting the child make decisions about toys, games and books, outings with friends and expenses they will incur on parties and fun.
All these exercises must allow children to make money decisions. Parents should not interfere but set rules clearly without making it all look like a righteous finance lesson. The practicality of everyday decision making must be woven in, without moralistic overtones, to make it a worthwhile exercise.
The second learning about emotional intelligence will get woven into the spending decision. Being able to postpone the need for instant gratification is a valuable money skill. Credit card defaulters in adult life were children who had their way all the time. Or did not have to think about postponing a need. The movement of decisions from the impulsive fast brain to the long-term oriented slow brain, is a developmental trait acquired with age. It is tough for a teenager to deny the need for immediate action; even tougher to sacrifice short-term needs for long-term good. The context of a limited resource, provides the scope for this learning.
Involve your children in simple decisions while eating out, taking a holiday, or buying stuff for the house. Desist the temptation to behave like God who will fund everything and that the family time for fun means everything is unlimited. There are life lessons in learning to play within rules, especially if rules are set by consensus. Next holiday tell the family what the budget is, and let them make the decisions about how to fund travel, where to live and eat, and what activities to buy tickets for.
The only serious and intense lesson to learn about money is time value. How inflation erodes value and how growth enhances it. If you must teach the math, the concept and the science, teach just this with examples and illustrations. This is the only piece that needs to go into a formal curriculum. All else has to be learnt by the doing, with the parents, in a fun and real-life setting.