QUESTION: Hi, I read your article on PhilStar.com. I have two questions: (1) At what age should I start teaching my child about money? (2) Do you have a program (excel file or whatever) on budgeting or monitoring income and expenses? Thank you. – from Aireen Canales via email
1. When I throw back the first question to parents, I get answers ranging from three to seven to teenage. However, I treat Financial Literacy as a journey and I think it’s best to start this journey really early on because it is a way of life.
So I encourage all parents to start the Financial Literacy journey of their child as soon as he is born. Open a savings account for him. That’s where you deposit the cash gifts that he will receive from friends and relatives on his baptism, birthday, Christmas and other occasions. Anyway, these are his money and it’s best not to commingle his funds with yours from the very start. Since he is still a minor, open an account “In Trust For.”
Can you imagine how many Christmases and birthdays there are before your child starts asking about money? And when he starts asking wouldn’t it be nice for you to say, “Honey, do you know you that you already have something saved up and invested?” This will set the tone of abundance in your child’s financial life. Just make sure that you are able to impart the correct values as you teach him about money so that this feeling of abundance is not confused with the feeling of undue entitlement. Entitlement means he can just use his money just because he has it and didn’t even have to work for it. Feeling of abundance is knowing that when money is conserved, invested well and respected, there will always be enough. And of course, this cannot be done in any great lecture but only by example from his parents.
As soon as your child learns to communicate, you can tell him that he does not have to spend all the aguinaldo and the birthday gifts he receives in cash. Make it a habit for him to automatically save and invest these gifts. If your child has godparents who regularly give him cash, encourage your child to invest these gifts in higher yielding instruments like fixed income investments and stocks. You may not realize it but your child has a higher risk appetite compared to you. He is still a minor and hopefully, you are the one providing for his needs until he becomes an adult. He has a longer holding period when it comes to investments.
When he goes to school and starts receiving cash allowance, instill the habit of setting aside a certain percentage of his allowance, say 10% to 20%. Create a system that is regular and automatic, if possible. When my sons started receiving cash allowance, we gave them a “treasure box” where they put their savings complete with a small notebook that records the amounts. When their cash savings in the box reaches at least P500.00, they deposit it in their savings account. When their savings account balance reaches way beyond the minimum balance, they invest in either fixed income or stocks. In other words, there is no need for them to keep their savings in low interest earning savings accounts.
As your child grows older, expose him little by little to your actual household expenses. You may show your utility bills to make him more aware about conserving water and electricity. You can bring him along with you when you do your groceries. Make a guessing game out of your grocery bill, restaurant bill, etc. When making purchases, explain to him your choices.
Money is an abstract concept and a lot of families use transparent jars or cute piggy banks to illustrate the concept of saving to their children. Some label their jars with Saving, Sharing and Spending to make it easier to understand for their young children where their money goes.
Remember that time is on your side when you start them young, so the earlier the better. To show the magic of compound interest to your child – i.e. how much he can accumulate by regularly setting aside money for saving and investing, go to Chapter 6 Magic of Compound Interest of www.RaisingPinoyBoyc.com. This will give you a free excel file wherein you can plug in your own values using your child’s actual savings and which will give you the amounts he can accumulate at different age levels.
If you think you missed out on this “as soon as your child is born” timing, don’t worry because the next best time is NOW! So start now.
2. On the second question regarding a program or file that can help you monitor your income, expenses and budget, there are free apps to choose from. Check your phone, if it is a smartphone, chances are there are various apps you can download for free. I tried using iXpense Lite on my iPhone and it was good. Since you carry your phone with you all the time, you have the ease of recording each time you incur an expense. It gives you a visual indicator of monthly budget vs. expenses, an expense summary for the month, average per day, etc. It also allows you to store digital photo receipts, generates graphical reports, and a lot of more.
I used it for quite some time to test it but when I changed phones I didn’t bother to transfer the data and since I’m a creature of habit I kept using my old and reliable (but now quite complicated) excel file which I started way back during the early years of our marriage. It has evolved from a simple Income Statement into a massive file called Monthly Cashflow and Income Statement. In the beginning, Expenses came after Income, now Investments come right after Income and the last items are the Expenses – our way of practicing “Pay Yourself First.”
The idea is to use something that you’re comfortable with. As much as possible, try to make it fun, and not too heavy an ordeal to record your cashflows. What we also do is to prepare Balance Sheets so that we know where our investments go. This makes saving and investing fun because we see our assets grow and it somehow helps us in delaying gratification. But that’s a whole new topic on its own.
For the meantime, I wish you Aireen and all the readers an enjoyable, even if sometimes challenging, financial literacy journey with your children.
Wishing you financial happiness,
(Image Attribution: Images of passbook and infant from newbornbabyzone.com put together by the author to help deliver the message.
This article is also published in RaisingPinoyBoys.com and PhilStar.com)