Good habits learnt from a young age pay off in adult life

Parents have a duty to instil a sense of financial responsibility in their children even when they are just emerging from the toddler stage. Here, RS Prasad reveals how showing youngsters the value of hard work, or offering a loan – with interest – to buy themselves a treat, will help them prepare for the years ahead.

It’s never too early to start

Children learn from adults. You can demonstrate how financial transactions work from an early age by letting them pay for goods at the checkout and receive the change in return. Very young children won’t understand the concept of a savings bank account, but you can shape their values and attitudes to savings by buying a couple of savings banks. Give one to your child and use the other yourself for loose change, so they can see you are saving as well. When they are a little older, family shopping trips can act as useful lessons in finance, as about 30 per cent of the average home’s income is spent on groceries and other household items. Letting your child know that you have a set budget for each trip and involving them in the purchasing process will help them understand the importance of value.

Give a weekly allowance

As your child gets older you should consider giving them a weekly fixed allowance. This will help them to understand the concept of having a “pay day”, something that will prepare them for the job market. It is important the amount is fixed so that children learn how to budget each week. Caving in to demands for extra cash each week sends out the message that money is easy to come by and takes away any incentive to save. Rewarding chores or good school work with an extra sum of money is fine, however, as it teaches that industrious behaviour secures an income. When offering payment for chores, agree the amount in advance. This will promote an understanding of negotiation and the value of labour.

Teach about debt by letting your child borrow

You can warn your child about the dangers of debt and paying interest by allowing them to borrow sums of money from you. By charging interest on small loans they will soon learn that debt is unappealing. Perhaps your child is keen to buy a Dh300 skateboard they have seen in the sales and doesn’t want to miss the chance of purchasing it, despite only having Dh100 saved. You could lend them the required additional Dh200 with the stipulation that it comes with a 20 per cent interest charge. You can then deduct Dh40 from their weekly Dh60 allowance for five weeks to pay the outstanding debt, with one extra week’s deduction to repay the interest charge. Your child will come to understand the concept of interest on debt in that final week when they have paid the purchase price of the board, but still have one further repayment to make before their allowance returns to the pre-loan level.

Ask them to pay bills

Bills are a fact of life and having your child appreciate this at an early age will prepare them for what is to come. It will also help with their overall money management. If your teenager has a mobile phone attached to your billing account, they need to know that they are required to pay for their share. If they are late with the payment, have their account stopped until their allowance can cover the amount. Charging a fee for use of the TV and internet will also help them to realise that these services don’t come for free.

Show them that money can earn money

You can start this lesson early with your child’s savings bank. Promising them an extra Dh2 dirhams for every Dh10 that they save will introduce the benefits and incentives for saving. Once they become teenagers, you can expand on this by revealing investment plans and options. If you have a financial adviser for your family, encourage your older child to sit in on any meetings so that they start to get a feel for financial planning. Drawing up a “money plan” that allows your child to keep an account of their inputs and outgoings is also a very useful learning tool. When it comes to increasing your child’s daily allowance, make a condition that at least a certain proportion of the revised amount should be invested. Discussing longer-term plans, such as budgeting for university, will help them engage with the idea of tuition fees, transport and accommodation charges for the new phase in their lives.

R S Prasad is the director of Nexus Insurance Brokers