As parents, we want to give our children a head start on a bright future. Teaching your child about money early will help them make sound financial decisions throughout their lives. There are a few things you can do to help them learn the importance of financial responsibility at a young age. Here are some helpful tips on how to raise financially literate children.
Where should you begin?
1) Encourage Long-Term Saving
One of the best things you can do for your child is to start saving early. Help them understand the importance of saving by setting up a piggy bank or savings account in their name. Show them how to deposit money into it regularly, and help them track their progress. As they see their savings grow, they’ll be more likely to continue the habit into adulthood. The drawback of using a piggy bank or savings account however is that the money is easily accessible and can be spent quickly.
A better way to instil good financial habits in your child is to open a fixed deposit account, which is more difficult to access. Fixed deposits work by earning interest on the deposited amount, which can help grow their savings over time. The key is to not withdraw the money until the fixed deposit period is up so that they can learn the value of patience and delayed gratification. To encourage more saving, you can also keep the deposit in your account for an additional term to earn more interest over time and to help them reach their savings goals faster.
You can also consider opening a minor “in trust for” account for your child. This is a fixed deposit account placed on behalf of your child. This can be a great way to teach your child responsibility and simultaneously protect their savings. With this account, parental controls are put in place to prevent withdrawals. It is only until the child turns 18 or when you think they are financially responsible, you can transfer the account into the child’s name.
By opening a fixed deposit account or minor “in trust for” account, you can teach your child about the power of compound interest and the importance of long-term savings. Compound interest allows you to earn interest not only on the money you deposit but also on the interest that has accumulated over time. This can help your child’s savings grow much faster than if they simply left their money in a regular savings account.
2) Guide your Child When They’re Making Purchases
When your child is considering a purchase, ask guiding questions such as “How long will this take you to save up for?” or “Is this something you really need?”. This can help them to think more critically about their spending habits and make better financial decisions.
You can also help them to understand the concept of value by comparing the prices of similar products. For example, if they’re looking at a toy that costs $20, you can explain that they could buy 4 books for the same price. This can help them to understand that sometimes it’s better to save up for something more valuable rather than impulse buying something that will lose its appeal quickly.
After they have purchased the item, encourage your child to reflect on their purchase by asking them how they felt about the purchase. This can help them to understand their spending habits and recognise when they’re making impulsive decisions.
3) Help Them Make a Budget
One of the best ways you can teach your child about financial responsibility is to help them make a budget. If your child receives an allowance, you can sit down with them and help them to track their expenses for the month. This can help them to understand where their money is going and how much they can save each month.
If your child wants to purchase something that’s outside of their budget, you can help them to figure out a savings plan. For example, if they want to buy a new bike that costs $100, you can help them to break down the cost into monthly savings goals. This can teach them the importance of planning and saving for larger purchases.
Making a budget can also help your child to recognise when they’re spending too much money. If they see that they’re blowing through their allowance each month, it’s a good opportunity to talk about ways to cut back on their spending.
4) Teach Them About the Dangers of Debt
Lastly, one of the most important lessons you can teach your child about money is the dangers of debt. It’s important for them to understand that borrowing money can lead to financial problems down the road. To prepare them for their future, you can teach them how interest works and how it can add up over time. For example, if they borrow $100 from you at 5% interest, they would need to pay you back $105 after one year. This can help them to understand how quickly interest can add up and how these debts can have a negative impact on their future finances. Help them to understand that it’s important to make smart financial decisions now in order to avoid difficult situations later on.
By teaching your child these money lessons early on, you can set them up for success later in life. By instilling good financial habits now, you can help them to avoid some of the common pitfalls that many people face when it comes to their finances.
Fidelity Finance offers deposits for as little as $1,000. Fill out our Fixed Deposit form and one of our Relationship Officers will help get you started on an account for your child.