The Hindu Business Line : Tips for financial child rearing

You raise your children. And you nurture them, both physically and emotionally. But there's one other dimension, says Jayne A. Pearl in Kids and Money, from Bloomberg (www.bloomberg.com). Today's children need all the help they can get to thrive financially in this world, because things have changed a great deal since you grew up, she points out.

"Kids don't learn the financial facts of life from their school teachers. They do absorb, from various media and friends, lots of messages, values and attitudes — many of which you may vehemently disagree with." Parents can make a difference, insists the author. But, remember, "Financial child rearing requires more than footing the bills for diapers and day care, braces and bassoon lessons, summer camp and college tuition."

Sex and money

Much like sex, money is a complex issue, says Pearl. "Unlike sex, though, the best way to teach our kids about the financial facts of life is to encourage them to begin experiencing it at an early age." To let them have money, there are five primary ways, viz. "the dole, gifts, allowance, loans, and jobs."

For dole, "make a chart with three columns: Date, purpose, and amount given," suggests the book, citing Sharon M. Danes. Parents have the control on haphazard payments, but the flip side is that "the more control parents have, the less chance kids will have to learn how to handle money."

As for gifts, especially from those outside the immediate family, you may not be able to control how much your kids get. "But, especially when they are young, you can — and should — limit how much of it they can spend and how much goes into their savings account."

An easy method of imparting financial literacy, values, and decision-making skills is allowance, says Pearl. "The main indicators of when your child may be ready for allowance are her emotional maturity, cognitive level, and what you want allowance to accomplish. Your child will provide you with plenty of clues," counsels the author.

How about tying allowances to chores? A double-edged sword, watch out. "On the plus side, it can instil kids with a sense of responsibility and a positive work ethic. On the negative side, putting a price tag on household tasks takes away the incentive for kids to help out just for the sake of doing a good deed."

Giving loans sounds easy, but there can be problems. One, you miss an opportunity of instilling "a tolerance for delayed gratification that is so important to creating a cycle of success." Two, "it teaches them, `buy now, pay later,' even if you were to charge interest for the loan. And three, "it robs children of a sense of independence and self-esteem that comes when they work toward and achieve goals on their own."

On work and money, a general rule of thumb is this: "Divvy up household chores among family members, without pay, for the jobs parents would normally do, and hire kids who want to earn extra cash to perform tasks you would otherwise pay an outsider to do."

A ready takeaway is a list that Pearl provides of different household activities, `appropriate for kids at different ages'.

A common mistake is to either underpay or overpay. "Pay them what you would have to pay other employees to perform similar work," guides the book. A tricky question can be this: Should you pay your 12-year-old child who is a computer wiz the same as what you'd pay a profession to write a complex software programme?

The answer is `no,' were you to ask `money psychologist' Olivia Mellan. "You should factor in a combination of their age and what feels right to them. You shouldn't pay them more than what feels like a good salary to them. Having a lot of money can feel weird, not great, to a kid," warns Mellan.

Money management

A chapter on `Saving and investing for tots to teens' begins with this maxim: "Financial success is not just the result of how much money a person earns, but how well she manages what he/she has." Pearl speaks of many ways in which you can provide savings incentives to children. She narrates the tale of one grandfather who told his daughter and her two children that their individual inheritances will be tied to whatever amount they've saved by age 50. "Make saving fun, celebrate saving," exhorts the author.

Another strategy is to set goals. Remember that children have a limited concept of time, and so you may have to start with weekly goals and graduate to longer terms.

At times, children may turn scroogelike, hoarding up all their allowances. Good or bad? Worrying, says the book, because such behaviour may happen due to "a sense of abandonment or lack of control."

Show your children how money saved can grow, by talking to them about interest rate, time, and compounding. "Once your kids begin saving, it's time to explain to them the many choices they have... You don't already have to be a financial wiz to orient your kids." The best way to grab kids' interest in investing is to tell them about your own investments, advises Pearl.

The first part of the book is on `planting financial roots,' and the second, about `sprouting financial wings.' For, as a Hodding Carter Jr quote in the intro reads: "There are two lasting bequests we can give our children. One is roots. The other is wings."

A book worth investing in, for the sake of the next generation.

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