Remember the days when a bank account was automatically created for you when you first started school? You would bring in your savings every week to be deposited in your account and have your bank book stamped. It introduced you to the concept of money and the banking system at an early age.
Well the days of the bank book are long gone – this means as parents and grandparents, we have a great responsibility and opportunity to help develop good financial habits in our children and grandchildren. And when it comes to teaching financial literacy, starting young with simple rules is the way to go.
The piggy bank is without a doubt the most common gift children are given to help them make their first steps into the world of money. It often comes with an explanation on the importance of saving. However positive this gesture may be, it’s generally missing a critical element: more piggy banks!
Money has different purposes. This is illustrated in large companies’ charts of accounts, which require for short-term and long-term needs to be separated. This reality is equally true at home – some of our cash must be spent on daily expenditures, some on longer term projects or needs. Children who learn these concepts and how to use money for different purpose early on, will develop good habits that will last a lifetime. A great way to help them integrate this knowledge is by using a system I call the ‘three money boxes’.
By having not one but three piggy banks or money boxes, children gain the knowledge and skills to use money for different needs. In my system (tried and tested on my son!), the first money box is kept for savings to buy birthday and Christmas presents for the family, teachers and so on. The second money box is for day-to-day spending, like an ice cream or a Lego Mini Figure. The last money box is for long-term savings and there is no day-to-day access to it.
As the child’s savings increase, the third money box can be replaced with a bank account, thus slowly introducing them to the banking system. Educating them about the basics of the latter is also part of teaching financial literacy. A key aspect is to explain the distinction between cash and credit cards and the importance of saving money instead of relying on credit cards. The final step is to guide the young financier in investing these funds in shares.
From a young age, we see money changing hands and get to touch it. This is a crucial step in helping us to understand what cash is. But as parents and grandparents, we also need to educate children on how to use money. Good financial literacy helps us make effective, smart financial decisions that can impact our quality of life and the opportunities we can pursue. Kids who learn how to use and save money wisely from a young age will develop good habits for the rest of their lives. The good news is, there is a very simple and great way we can start teaching our children financial literacy… and that is by taking that one piggy bank and multiplying it by three.