A
budget is a new concept to children as much as it is for many adults
too. Younger children, especially, simply won't realize that mommy and
daddy have a limited amount of money to spend every month. But learning
what a budget is, and why it's a good idea, is one of the central
pillars of financial literacy.
The
best way to teach kids how a budget works is simply to show them. That's
not to say that you should open your books up to your children and show
them every penny coming in or out (although you may consider sharing
some details with teenagers about things like your mortgage payment, car
payments, and so on). Instead, just give them a broad sense of how
adults have to divide up their money each month.
One
easy way to demonstrate this concept is to take a stack of Monopoly
money, and tell your child that the stack represents how much money you
make every month from work. Then, divide up the bills one at a time to
show how much you spend on the house, how much you spend on food, how
much you save, how much you give to charitable organizations, and so
forth. The denominations aren't important. What's important is showing
your children that you have a conscious plan for your money, and that
you're on top of the family finances.
Encouraging
children to start a budget of their own is key: Part of their allowance
should go to savings, part to charity, and part of it is just for fun.
Help your child identify what he | she truly values, and budget their
money accordingly.
4. Embrace the power of compound interest
Here's a
story of Albert Einstein, when asked to name the most powerful force in
the universe, answered "compound interest." While the story may not be
true, the concept certainly is. Compound interest simply means that the
rate at which your money earns interest increases over time.
The earlier you start saving, the better.
5. Beware of credit
Credit
cards can be valuable tools in a healthy financial lifestyle, however
children need to be taught from an early age that credit cards are not
free money. Here, again, we can give age-appropriate lessons on how
credit works by simplifying the concepts and acting as your child's
bank.
As they
grow up more information like loans, EMIs and Overdraft facilities and
more can be taught to them depending on their ability to understand
these concepts.
6. Be a Role Model
This is
the final and most crucial step of all of the above. If we are not seen
doing all of the above as an adult, then children will know very
clearly we do not live these habits on a daily basis. Then, they start
getting confused and will end up being confused about their finances as
well.
