According to a recent report by Cambridge University in the UK, children start to formulate money habits as young as age seven. Therefore, it is clear that the more parents can teach their offspring early on, the better chance they have of becoming financially savvy adults. Here are six useful tips for making kids cash smart:
Tip 1: Lead by example
Parents are the greatest role models any child will have when it comes to financial awareness, so what they see you do really matters. "Leading by example is just as important as telling your children what to do," said Hamzah Shalchi, Regional Manager at Guardian Wealth Management in Dubai. "They will look to copy your money practices until they are old enough to make informed choices, so show them how to be responsible. For instance, my parents always paid cash for big ticket items such as cars rather than getting them on credit, which has meant that now that I am an adult I always assess whether I can actually afford something before I purchase it, rather than racking up unnecessary debt."
Tip 2: Involve them in family finances
Brendan Dolan, Regional Director for Old Mutual International MEA advises full transparency in the home about money issues. "Eighteen-year-olds living independently for the first time receive quite a shock when confronted with the realities of managing a household budget," he said. "Demystify this, sit down and show them your bills and statements and demonstrate how you keep the lights on and fridge full."
Tip 3: Wants versus needs
Dolan also stresses the importance of explaining to youngsters the difference between wanting something and actually needing it. "A need is something I can't live without," he said. "A want is something I would like, but not having it isn't going to kill me. Many think if you understand this and compound interest you are set for life. Ask your child to write down the last five things they spent their money on or what they had bought for them. Get them to measure each item against the above definition and present back."
Tip 4: Explaining money splits
Child psychologists such as UK-based Dr Elizabeth Kilby, say it is crucial to show children that money can play a variety of roles in their daily lives, whether it is spending today, or saving for tomorrow. Providing pocket money in lower denominations makes it easier to allocate a proportion of income to different goals. Labelled jars are a good idea for separating money – one for saving, one for spending, and one for donating. Any time they make money by doing chores or receiving birthday gifts, parents can encourage their child to divide the cash equally among the jars. It’s not a huge act, but it does show that it’s OK to spend some money, as long as you are giving back to others and saving as well. Once they are older, their bank accounts can mirror the split.
Tip 5: Promote the value of hard work
Shalchi adds that instilling a good work ethic into children is also a good idea. "Money certainly doesn’t grow on trees, and kids need to understand that," he said. "Pocket money is a good tool for teaching money management, but this should not come for nothing. Set children one task each week that they must complete and reward them not only when it is done but if it is done well, they will soon associate hard work with rewards."
Brendan Dolan of Old Mutual International MEA agrees: "Most parents do not give allowances or buy gifts for nothing in return, but some do – place a value on work or chores for a reward, then together identify savings goals and agree steps on how they can reach them," he said.
Tip 6: Take it to the bank
A US study by the University of Kansas found that children who have early access to savings accounts accumulate more assets—an average of US $2,000 compared to $100 for those who did not have a savings account as a child—and are four times more likely to invest in stocks as adults. Opening a savings account for a child will also teach them that money can earn interest, and that those earnings, in turn, generate more interest. Indeed, many UAE banks allow parents to open a savings account with low minimum deposits.