Meet Asha Mahajan, 28, a creative writer in an ad agency. Her six-year-old daughter Sapna is upset because Asha refused to buy her a new Barbie doll. This was after Sapna broke the one her parents gifted her on her birthday just a couple of days ago. Most children her age would get a new toy from their parents if they broke an old one, says Sapna.

Asha is finding it difficult to explain her decision to her daughter; particularly since they can easily afford a new doll. She thinks her daughter is too young to understand the value of money. 

If you face the same problem, here's help on how you can guide your child's first steps into the world of finance.

Getting started

A big question every parent faces is: what is the right age to start giving your child an allowance?

Dr Nilesh Shah, psychiatrist and child psychologist at Sion Hospital, Mumbai, says, "It is important to involve your child in your family's budget plans right from the age of five or six. This will prioritise their monetary needs and help them understand the value of money."

As a parent, you need to develop techniques that will help to make your lessons count.

Why save

Every parent has to embark on the road to finance by making their child understand 'Why save.'

• Parents, children and bedtime battles

This question has two replies:

~ The first comes from Sanjay Parekh, a businessman who advises his boys, "Save for the future. Earn interest on the money saved and see it multiply with the beauty of compounding".

~ The second comes from Rashmi Kolhatkar, a dietician who teaches her children to save money by keeping a goal in mind  -- like Rs 100 to buy a toy. This teaches them how to save; as they grow older, they will learn how to prioritise and save for a number of different goals.

Savings and investments

The first step towards saving is to buy your child her first piggy bank. The excitement of putting 'her own money' in her bank will motivate her to save.

Start with an allowance, which you could give your child on a daily, weekly or monthly basis. Then, tell her how she can save:

• Say a week's allowance every month
• Percentage saving: Here, you let your child decide the percentage of allowance (for instance 25 per cent) she wants to save every month
• Goal saving: Where your child can save for birthday gifts for her parents, friends or sibling or for something that she wants to buy

Children belonging to any age group can adopt any of the above techniques. In addition to the regular savings, you must make your child to save money received by way of gifts.

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Whichever technique you adopt, make sure your child understands the importance of money. Make her earn her allowance.

For instance, make her do errands for which you pay her. If they fail to run this errand successfully, deduct a small amount from their allowance. At the same time, ensure you do not reach a stage where your child does chores only because you pay her.

Financial education also involves teaching your child to invest her savings fruitfully. 

Encourage her to increase her savings from time to time. Explain to her the importance of investing her savings. Involve her in your investments and in investments you make on her behalf.

Dr Shah says, "Your child will feel involved and a sense of responsibility will develop." As and when the investments receive interest, she should be informed; this which will motivate her to continue saving.

Spending

Educating your child about prudent spending is an important part of financial education.

Many children try to follow their parents' saving and spending habits. You have to be careful when dealing with money.

• Is your child low on confidence? 

Dr K P Dave, a psychiatrist, says, "Parents play a vital role in inculcating the saving habit in their kids. If you are careless with your finances, your child may have the same attitude."

Most parents usually avoid discussing money matters in front of their kids. This is not necessarily a good idea. You need to involve your kid in budgeting. At the same time, do not interfere in her spending plans. Asha, for example, says, "I let my daughter decide what she wants to buy. If it is expensive, I explain in private why she should not it."

You should insist on your child accounting for the money she spends; tell her how you can never recover money that is carelessly spent.

This will help your child learn money management.

Conclusion

Being financially savvy is as important to an adult as it is to a child. In today's world, the new mantras are 'plastic money' and 'spend now, save later'. In such a situation, a financially savvy kid will carve a better future for herself and her family.

The author is a financial consultant and can be reached at dhanplanners@gmail.com.