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WHAT PARENTS NEED TO TELL THEIR CHILD ABOUT THEIR OWN FINANCE

This is a topic of debate. The old school of thought believes that parents should not involve children in the financial planning & budgeting exercise. Money matters are complicated and children should not be saddled with them till the time they grow up. Once they themselves start earning, they will anyway, necessarily need to get involved.

The new school of thought believes that parents should introduce children to money matters at an early age and as they grow up, give them a complete sense of financial planning. A good way of doing the same is to start involving children in family financial decisions once they are in junior college. At this age, they are just close to adulthood and are extremely aware of their surroundings. They are given a certain amount of money as monthly allowance and hence are already introduced to the concept of ‘financial planning’. They use their allowance to take care of several personal expenses.

There are several ways in which parents can introduce children to ‘parents own financial planning’. It is important to be completely honest with children in this interaction for them to be able to appreciate the importance of ‘real life’ financial planning done by parents. Some interaction examples are detailed below:

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Monthly household budget planning – Involve your children in planning the monthly budget once they grow up. Inform them of the various income & expenditure streams. Maybe, in one month, ask them to draw up the ‘best budget’ as according to them. Post the budget, give them your views of what needs to be prioritized or removed. However, let them run the household as per their final plan. You run the risk of ‘over-expenditure’ due to poor planning but it is also possible that you realise that your son/daughter is extremely efficient and is able to handle finances as good, if not better then you. Such an exercise will give a complete round-up to the budgeting exercise and also help them appreciate better why/why not some of their demands are met by you!
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Extensive financial planning required for children’s future education – for eg: if your son/daughter wishes to get into medical/ engineering/ MBA or go abroad, a significant amount of money is required. As a parent, you would have begun planning for this requirement years back when the child was small and if today, that lump sum money is available, it is because long-term planning went into it. You should sit and explain how investment done 10/15 years back on a regular basis have bee able to provide the funds at this time and that if this planning had not been done, there was no way, you could have been able to afford this expense. This will give two perspectives to your young adult: that however rich you may be, the amount of money available is always limited and for any large expense, planning needs to be done. He/she will also understand the true financial status of the household which is extremely important for them to table realistic demands.
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Purchasing consumer durables/ expensive goods for the house – Depending on the financial status of any household, various kinds of capital purchases are done. For eg: refrigerator, TV, DVD player, music system, jewellery, etc. Again here the concept of ‘financial surplus’ plays a part. It may be possible that you have pressure from your kids to buy a new car since the old one is not good enough or because their colleagues have fancier versions. In such a case, if this purchase fits into your planned cycle, the case is simple. You should involve them in deciding the model, the price, the accessories and discuss ways of ensuring you get the best bargain. However, if you cannot afford to buy the new car, you need to upfront and inform your children that you cannot undertake this expenditure due to other planned financial pressures and maybe plan that they contribute to this purchase once they start earning.
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Savings & investments planning – All of us as individuals save and invest money across formats – fixed deposits, bonds, provident fund, mutual funds, real estate, savings account, etc. All this saving & investment grows over a period of time and becomes a financial asset available for posterity. One aspect of explaining about your own finance to children involves informing them of the money saved & invested; some of which may be in their name and some in other family member’s name. This is a sensitive topic and many parents are not comfortable sharing such intricate details with their children. However, we advocate that such candidness will not only help fortify the relationship but also give a higher sense of responsibility to the son/daughter. They will feel obliged to the parent for making such efforts to ensure a prosperous future to them and learn to respect them more. However, this discussion can be tempered depending on the extent of family closeness and ties.
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Tax planning – One of the most important and difficult aspect of financial planning is tax planning. But, as responsible parents, you must introduce your children to the concept of taxation and how it operates. They must learn that as responsible citizens; correct income, expenditure, saving & investment details need to be provided to the government to ensure correct taxation happens.