Sunday, August 10, 2014

What to teach your children about money?

It has been found that children as young as seven years old can understand the concepts of money and finance. So the question is, what will you teach them? Especially if you are not financially literate? 

Considering that money  is related to behaviour, the easiest things to teach the kids is 'wealth accumulating' related behaviour. These are behaviors and habits, if developed and maintained over a period of time, can help children grow as wealth accumulating adults. 

Here are a few such behaviors that you should teach kids and encourage their practice.

First one is related to Delayed Gratification. This is the habit of putting off instant gratification for a better outcome tomorrow. A simple example of this would be telling your kid that 'he can have one ice cream now or he can clean her room now and can have a weekly supply of ice cream'. A child who is aware of the benefits of delayed gratification will choose the latter option. It has been found that the children who practice this behaviour go on to achieve significant success in life. A college kid who refuse to go for a movie today and studies instead for the exam next week is exhibiting delayed gratification. A child who practices delayed gratification will ignore the plaintive pleas of a toy salesman knowing fully will that he will outgrow the toy in a week. 

Second behaviour that you can teach the child is the power of options. This involves trying to find out similar products in the market as the product that they liked in a shop and comparing the prices. It is very easy in the age of Internet. 

The power of options also means that the child will have to analyse the real reason for wanting something and look for the best product can meet the requirement.  An example of this could be buying a reasonably priced piece of clothing instead of an exorbitantly priced 'Designer Label'.

Another good habit to teach the children is the habit of analysing the intrinsic value of a product. The manifestation of this habit is asking the question: is this product worth the price? What factors determine the price? For example a branded pair of Jeans may cost anywhere upward of Rs.2000. But the same pair of Jeans, made by the company that exports its Jeans to the retailer, will sell it unbranded, made in Surat and will cost you probably Rs.400. Which means that for something whose value is about 200, you are ending up paying about 2000. This is no way to accumulate wealth.

Children should also be taught to identify and act on opportunity whenever it presents itself. The moment they identify something of value that is useful to them, it is better to close the deal quickly. This is the opposite of Delayed Gratification. If the opportunity is one that will be beneficial and it has good value (reasonably priced) the deal should quickly closed. 

One of the key reasons for making wrong financial decision is the fear of loss of opportunity. Children should be taught to handle the fear of loss of immediate opportunity. They should be asked to evaluate whether this is a permanent loss or a temporary one. For example, you see something on the shelf that you think is a bargain. The marketeer would have put a big notice 'Discount for next three days only'. There is a desperation to buy for the fear of losing the bargain. You don't do any of the analysis mentioned in steps above. You don't see the intrinsic value, you don't ask the question, why is this on a bargain, why was it not sold at the original price? You don't evaluate your real requirements. Only thing that guides your spending decision is that if I don't act now, I will lose this bargain. Action without proper due diligence is the best way to lose money.

In today's world, spending money has become very easy. You just have to check out an Online Market for any product and next time you so much as start the computer, the products you queried will be dancing in front of you all over the computer screen. In this environment, it is very easy to purchase online since the entire process so easy. However easy spending doth not rich you make. Frugality is an important habit that children (and even adults) should learn quite early in life. As Dr.Stanley and Mr.Denko point out in their path breaking work, 'The Millionaire Next Door', Frugality is one of the key attribute of every millionaire they analysed. Remember, One Dollar saved today could give you 10 dollars compounded 10 Years from now !.

It may sound counter intuitive but one of the important habits that children should learn is the Habit of Giving. Children should be taught to give at least 10 percent of their income to Charity. More importantly, they should be taught to donate their time, which is a more valuable resource for children. Right from the young age, children should be taught to express gratitude for their advantages that many disabled children can never hope to gain in their life time. 

Greed is the number one enemy of wealth creation. Doesn't make sense, does it? The problem is that greed makes you fall in love with your possessions and prevents you from exiting from them at the right time. Greed can be emotional, one may fall in love with your negative thoughts and refuse to give them up despite the fact that they are hurting. Greed may be financial, one may fall in love with their bad investment and refuse to sell despite evidence that they are floundering. Right from the childhood, children should be taught to handle greed.

Despite what Gekko says, greed is not good.

While I won't call it 'Bargaining', children should be taught the 'Art of Negotiation'. When it comes to wealth building, the art of negotiation deals with identifying the worth of a product by mutual discussion and price iteration. This ties in with the point I made earlier about identifying the intrinsic value of anything that you purchase.  You can be a good negotiator if you are good at assessing the intrinsic value of something. 

Another good habit to learn is the 'Art of Walking Away'. When it comes to making and keeping wealth, the kids should learn to Walk Away and not be emotionally involved in the process of procuring something. The best way to do this is by teaching them to handle the situation with a sense of detachment and not to be emotionally involved and not to fall in love with a product. Remember, we are not talking about the quality of the product here. You are negotiating because you think the product is good. You are negotiating the terms for procuring the product. In that negotiation, your ability and willingness to 'Walk Away' can give you a whole lot of leverage.

So there they are. My list of financial habit that one should inculcate in their children.

What do you think?

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