4 Tips to Inculcate Financial Discipline in Children

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4 Tips to Inculcate Financial Discipline in Children
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We know that children often mimic their parents’ behaviour when it comes to money and financial discipline imbibed young stays forever. Efficient money management is also essential to build wealth and to successfully address major life goals.

As a financial advisor, while you help your clients build wealth, it is equally important to advise them on ways and means to conserve wealth by building an environment of fiscal prudence among their kids.

Here is how you can advise parents on inculcating financial discipline among their children.

Let Your Children “Earn Their Wish”

It is common for parents to fulfil everything their children wish for. Be it buying an expensive gadget, a flashy toy, or trendy clothes; most parents give in to their child’s demands as they feel obliged to do so. However, this can ruin a child’s financial habits.

Instead of fulfilling every wish of their children, advise parents on asking their kids ones to “earn their wish”. For instance, children often receive money as gifts during family get-togethers. They must be encouraged to save this money and use it to buy the things they want.

Introduce Children to Savings and Piggy-Banks

Piggy-banks are a practical way to introduce children to the concept of savings and to bring financial discipline. Parents can gift their children transparent piggy-banks where they can deposit the money received as gifts. A transparent piggy-bank helps the child notice his/ her money grow when deposited and deplete when withdrawn.

Parents should encourage children to use their savings to buy items they need. When a child notices his savings dip on spending, he would think twice before buying an item that is a mere indulgence. This would help a child differentiate between needs and wants.

Introduce Children to Banking and Investment

At an appropriate age, familiarise your child with financial institutions like banks, and its functions like accepting deposits, allowing withdrawals, accepting negotiable instruments, offering passbooks, etc. Parents must open a joint savings account with their minor children to teach by example.

As per RBI guidelines, a minor child above ten years can operate a savings account independently. [HI1] [AC2] Going through the entries of a passbook on a regular basis would help a child understand cash flows.

Try to coincide your real-world teaching with academic concepts like compounding, inflation, and purchasing power. This will help you introduce the topic of investing, and introduce basic investment products like fixed deposits, and eventually mutual funds, real estate, bullion, etc.

As your child starts earning pocket money, encourage him to create a budget and introduce a savings component. Facilitate him to start a SIP (with as less as Rs. 500 a month) in a mutual fund and aim for a long-term goal. The invested amount can be slowly increased with time. In a few years, your child might experience the power of compounding and appreciate the value of being a disciplined investor.

Being Prudent with One’s Own Finances

As discussed, children generally pick their money habits from their parents. Hence, parents must be careful with their spending patterns and curb splurging so that their children follow. This means that a windfall received as a bonus is better utilised in paying off outstanding loans or making a lump sum investment rather than upgrading a perfectly functioning smartphone. When parents stem frivolous spending and get disciplined with their finances, their children would soon follow suit.

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Don’t give in to every wish your child makes. Ask them to earn it. Be a role model and coincide your real-world teaching with academic concepts like compounding.

Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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