A successful businessman now, Harish Sindhwani recalls how his father taught him to invest at a very early age which has benefitted him in the long run. It has made him a smart investor as well as a smart businessman. Sindhwani fondly recalls how he bought a cricket bat for Rs 25 after making an investment of Rs 15 in two months.
The senior Sindhwani who is now retired, taught economics and probably as a ripple effect of what he was doing in college decided to give his son some investment lessons. So, while the 12 year old son earned at the rate of 1 per cent on his investments, he was charged 1.25 per cent when he was borrowing. Harish Sindhwani's father is obviously the personal banker here.
Children are financially dependent on their parents for obvious reasons. Senior Sindhwani is wiser than other parents because he taught his son about the basics of how the money market operates namely borrowing and lending. While other children simply borrowed, Harish Sindhwani understood the implications of it while doing the act.
As parents, most of us are increasingly obsessed with doing the best for our children. But the time and money that parents today seem to spend on their children seem out of proportion to what it was in previous generations. Of course, the neuroses of modern parenthood is something that an investment magazine is not qualified to comment on. But we are sure of one thing-if our children learn the basics of handling money then they will grow up to have far fewer money-related problems as adults.
We know that as parents you worry about your child's future. Though health and education are a top priority in your worry list, not very low on the list are worries about his/her savings and investment habits. With 16 years of experience as investment advisors we have decided to guide you to help your child take baby steps in this direction.
Mentioning money is not a taboo
Most parents have this strange notion that money matters should not be discussed in front of children. It is part of their endeavour to protect the child from harsh realities of life. You are not helping the child at all by doing this as he gets a distorted view of the function of money in day to day life. As a result the child grows up with the impression that money doesn't have anything much to do with the necessities of life like food, housing and education, but is instead a fun thing solely connected with watching a movie, shopping or eating out. You cannot really blame the child for thinking like this as he/she gets to participate in only these kind of activities. In order to make the child wiser about money matters it is very important to explain to him/her how money works and slowly nudge him/her into participate in the real use of it. It can start with mock participation and eventually be a real one.
The Flow of Money
You can start explaining to the child probably when he is around 10-12 years of age, what money is and how it affects our lives. This can be done without mentioning the actual amount. A child should know that you work hard and dedicate considerable amount of time and energy to earn it. Once the money enters the boundary of your home, it is marked under separate heads for expenditure, like housing, food, education and health. Explain to the child that when money goes out in the form of payments, it enters another person's home and goes through the same cycle.
In order to help your child understand this cycle better we are illustrating the following example. When you pay your grocer for a packet of bread you are not just paying him but an entire chain of stakeholders beyond him. The grocer doesn't bake the bread loaf himself, but buys it from a factory that makes it. The factory in turn uses the money to buy the ingredients like flour and oil, pay electricity and salary bills.
The grocer and the people who work in the factory have families like yours, who also use the money in a similar fashion. The example should work very well if you could somehow 'close the circle', that is, show some part of the money coming back to you. For example, if you are a businessman making furnitures, you could talk about how some of the people working in the bread factory may actually be buying furnitures from you, using, as the child sees it, the 'same' money that you had used to pay for the bread.
While children usually understand far more than adults give them credit for, you can be in a profession where the money flow is a little more complex. For example, a government job cannot be fitted into this flow without explaining taxation and for that you need to see if your child is mature enough to grasp this concept. In such cases you could explain the flow by giving an example of a neighbour or a friend.
Young adults often find themselves handicapped while taking financial decisions because as children they do not get enough training or exposure to concepts and practices of savings, credits and investments. The best way of doing this is to set up a home bank like the Sindhwani household did many years ago. For the home bank concept to be actually successful it is important that children are given a fixed 'income'. Most Indian parents may not be familiar with this concept but this is a crucial prerequisite for your children's financial training. In the absence of a fixed allowance, children's basic attitude towards money is that whenever they need it, they can ask for it, and if their story is convincing enough, you will open your wallet.
Affluent sets of parents may find the idea of having a fixed allowance for their children very strange. The attitude among the rich and wealthy in India is that their children should never lack or be deprieved of anything and instead have everything in excess. This can lead to nowhere else except disaster. You need to keep in mind that a fixed allowance need not be a small allowance. If you have pots of money and feel it is fine for your children to buy expensive things routinely, then by all means, go ahead and fix the allowance as high as Rs 10,000 or Rs 50,000 a month or whatever suits your lifestyle, but fixing the children's discretionary spending at some level is absolutely necessary to train him/her to be financially disciplined.
Let's take a look at some details of how the Sindhwani home bank worked. The basic idea behind the home bank was to teach about savings and by extension borrowing and lending. As compared to adults, children live on an accelerated time scale. Being impatient by nature, a month feels like a much longer period of time for a child than it feels for an adult. A home bank will achieve its goals only if the results are quickly tangible to a child, and that's the reason why it should run on a daily interest cycle. Also, it should have a high enough interest rate to actually have a significant impact in a month or two, which means a rate of 1 per cent per day is fine.
By this method, children can experience for themselves a first-hand feel of savings and the advantages associated with it. It also gradually instils in them the strength to postpone gratification. When children find that resisting the temptation to spend Rs 100 takes their savings to Rs 133 at the end of the month, the delayed gratification aspect comes to play and the habit benefits them in the long term. Attractive advertisements and consumerism are often responsible for eroding the income of a family by pushing towards impulsive buying.
Given the large number of people who are inflicted with credit card overuse, the loans business of the home bank is probably more important educationally than the deposits business. A child will quickly see how taking a loan to spend must be done in a planned way. One must be able to repay the loan quickly enough from one's income. Giving in to an impulse and taking a big loan without a clear capacity for repayment will quickly lead to spiralling dues, just like they do on credit cards.
One feature that the home bank must have is a compulsory minimum monthly loan repayment, just like credit cards. This is to guard against loans going 'bad', that is, a child taking a loan and then finding himself/herself able to not repay and still be able to spend future allowances. A compulsory repayment of 20 to 40 per cent of the outstanding loan is adequate for the educational purpose to be served and is a guard against large loans and spiralling interest.
While all this may sound too rule-driven for a child, you must remember that the sole purpose of the whole exercise is educational. This 'banking' system must have fixed allowances and fixed rules for it to teach children about the functioning of the real world. If children can bend the rules by just asking you nicely, then the educational purpose is defeated because in the real world, there is little chance of getting a lender to write off a loan merely by smiling and asking nicely.
Making kids ad-proof
For a youngster, the ability to handle one's finances is basically tied to being able to spend wisely. Here, our increasingly consumerist, advertising-driven environment is the mainly responsible. A bulk of Indian families with young children have parents who didn't have to withstand the continuous assault of advertising when they were young. Their own childhoods happened in the seventies and eighties-long before liberalisation-when there were far fewer nice things for Indian kids to buy and little advertising to drive them towards overspending. Therefore, the current generation of young parents have no first hand memory of how much more psychological pressure advertising produces on kids than on adults.
This means that an important part of a child's financial education must consist of the de-glamourisation and deconstruction of advertising. Teach your child to distinguish between advertising and content on TV and in print. Bring advertising into the money flow while explaining to the child and clearly pointing out that in order to make more money, companies always claim that their products are better than others and that everyone must buy their products. A child must understand that a lot of things that are said in advertisements are simply not true. Advertising professionals understand child psychology and motivations and expertly manipulate them. In order to stand a chance of withstanding this assault on his pocket-money, a child must understand at least some things about the psychology and motivations of advertisers.
Transitioning to Real Finances
As a child grows up to mid-teens, it's time for transitioning him to handling some of his real expenses. Apart from the basics like housing, food and education, most other expenses should be shifted to the child's own, expanded allowance. You could budget things like clothes, shoes, gadgets and non-family vacations (which are the ones that start ballooning at that age) to a single annual figure and let a child apportion money between these expenses. The very act of buying, say, cheaper shoes in order to pay for a portable MP3 player or a gift for his girlfriend is great financial training for the future adult.
Of course, at this time you will probably have to change over your home bank to more realistic interest rates. However, if you have been running the home bank for some years, you will probably have a lot of ideas to customise its services in ways that are uniquely suited to your family.
At Value Research, we are acutely aware of the fact that a large proportion of people have very little 'money sense'. A good number of the queries and help calls we get from investors betray a near-zero understanding of the basics of savings, interest rates, budgets and investing. The reason why this happens is that (apart from learning the formula for compound interest at various stages in school), we have no education in handling money. The idea that money can be controlled and managed by thinking about it clear-headedly and by following some simple rules is something that never gets into the heads of most of us.
Money is a complex thing. The complexity comes not from the fact the arithmetical calculations needed to handle money are complex but that many of us tend to react irrationally and emotionally when faced with money issues. Understanding and managing money is a key skill that every human being needs, regardless of what he does in life or how much money he actually makes. And yet, this is the one thing few children get taught. Give your child the advantage being able to manage money before he actually starts earning it. This could be the most useful thing you give to them.