9 steps to ensure your child grows up into a financially responsible adult
Posted by: Uma Shashikant on Sep 18, 2017, 06.30 AM IST
Last week we met friends whose children had just joined college. They remained anxious about how the 18-year old young adults would manage their lives independently after leaving home. Every action has a consequence, most parents tell their children. Perhaps several times over.
However, in their heart they would like a world where their children could grow up into responsible adults, without being bruised by ill thought out actions that bring about regret and remorse. They asked me to make my usual list of points for parents and children to think about.
First , the attitude of your children towards money is shaped mostly by your family environment. If you have been the type of person who considers the merit of every financial decision and consistently makes it only after deliberation, your children would have picked it up.
Swiping your card carelessly for impulsive purchases, and hoping that the children will somehow turn out to be better versions only because you extolled on the virtues of careful spending, is expecting too much. Consider your money habits as a family, so you know what to expect from the children you have sent to college.
Second , unlimited cash out of the ATM and unquestioned replenishment of the bank account so that you do not displease your child, are harmful for their well-being. The single-most important money lesson to learn early is that it is but a limited resource, and even if you had plenty it always comes with alternative uses.
Agree on a monthly allowance and stick to it. Make sure you have a good idea of all the other extraordinary costs for books, memberships, travel and other big-ticket items and provide for it in advance.
Third , make the budgeting exercise a joint affair in which your child agrees on how much will be spent and on what. Make it an exercise of assessment of the cost of living, including mandatory expenses and discretionary expenses, so your child knows how to allocate between eating out and paying the cellphone bills.
If there are other little luxuries that your child wants to indulge in, encourage the possibility of taking on part-time work. Even if it is a menial task of waiting tables, they will learn how to show up on time, do what is expected, perform to a standard, and earn money they can call their own. Do not dismiss it as not worth the few rupees it fetches.
Fourth , teach your child the use of online software that will account for their expenses under multiple heads. Teach them how to make electronic transactions, how to keep the account secure, how to manage an electronic wallet, and minimise the use of cash so that accounting becomes easy. Ask for the accounts to be shared with you, so you know what is going on.
You don't have to question each spend, but since you are the one financing it all, do not give up the authority to hold them accountable. Little amounts add up, and children will be able to better appreciate how their lazy take-outs for food have snowballed into a hefty sum.
Fifth , remind the child that the money habits they display are noted by their peers and friends, and will lay the foundations of how money transactions will happen in a group. Many are shy about bringing up the question of how to split the grocery bills, or how to pay for joint trips and eating out.
Since no one is earning most of the money that is being spent, it is better to split the expenses equitably. Lending to friends is an avoidable habit, as one loses both the money and the friend, unless recovery is prompt. There are many mobile apps that help boarders manage group expenses efficiently.
Sixth , allow the child the dignity of not having to ask and remind you about sending them the allowances you had agreed. Set a specific date and make sure you have remitted the money as promised, so that they learn to await the credit and manage themselves better. A fixed sum that will pay for their transport back home, in case there is an emergency, can be left in the bank account or with a trusted relative or friend who is willing to take on the responsibility. Such amounts are also useful in case of any medical or other emergencies, and provide a sense of comfort to the child.
Seventh , teach the child the basic rules of safe banking, using a credit card, and online transactions. These conversations tend to be boring and the child might protest. Ensure that you create an environment of learning, even if it means the child will teach you or your spouse, about how to do these transactions safely.
Ensure that they know what they should do if they lose their debit cards or identify any misuse. Financial literacy is an essential skill and the minimum the child should know are operational and security features associated with the financial products that they use.
Eighth , if there are investments back home in which they are first or second holders, after they reach the age of 18, these folios, accounts and other investments will not be accessible to you. Before they leave home, ensure you have converted them all from minor accounts into major accounts, by completing the paperwork. You will not be able to access, redeem or close any of these accounts without their consent and signature. Their signatures have to be attested by the bank, and submitted to the concerned institutions.
Ninth , let them know that you will wean away from their finances over time, and look forward to them leading their independent financial lives when they graduate and find a job. Do not be too eager to know what their salary would be, or compare them with others, or brag about their earnings.
Allow them to enjoy the financial freedom for which they have worked hard. Do let them know that defaulting on their educational loan will hurt their credit score, and if you are the guarantor, make sure the loan is repaid.
When the children turn 18 and leave the house, you have to also move from the arena where you worked with them, and sit in the gallery to watch and cheer, coach and encourage. Do not yearn to be their friend, or be scared about offending them. Parental love allows authority that you must exercise without being overbearing and intolerable. Tread responsibly.
(The author is Chairperson, Centre for Investment Education and Learning)
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com. This article appeared in Economic Times dated Sep 18, 2017, 06.30 AM IST