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As part of financial education given to the child, the child must be taught on how to work on a specific budget. ‘Budget’ is defined as a specific amount of money available in one’s hands to spend and save over a fixed period of time.

Budgeting involves the concepts of income, spending & saving. The concept of income can be easily introduced by giving ‘pocket money’ to children; spending can be defined as ‘ expenses on school canteen/ friends birthday gifts, weekly outing’, which can be done using the pocket money. Lastly, the concept of ‘saving’ is critical to be taught to children in the sense that parents must explain to children that money given is not meant to be spent immediately; a part of the money needs to be kept aside for later either exigencies or planned ‘bigger’ expenditure.

The single most important component of ‘ budgeting exercise’ is ‘saving’. That is because, unless children understand the importance of spending in a controlled manner, they will inculcate the habit of ‘ unlimited spending’ and hence grow up to be financially un-savvy persons. An easy way to incentivize children to save can be by deferring purchase of their desired game/toy/ apparel/book. For eg: If the child wished to buy a Barbie doll worth Rs.1000 and you as a parent follow the policy that children should be given gifts only on an occasion or when they do well in academics, etc; then you can explain to your child that she needs to set aside a certain sum of money from the monthly allowance been given to her. That money can be put into a fixed place in the house very month/week and demonstrate to her how the money is growing over a period of time. Once the money equals the amount required to buy the Barbie doll, you can buy the gift to your daughter. With this, she will not only appreciate the importance of saving but also know that ‘saving over a period of time leads to fulfillment of desires’.

Linked closely to the savings piece is the concept of spending. The easiest thing to do for any human being is to spend the money earned! The important thing that children should be taught about spending is that money available must be spent intelligently. Most people have available only a fixed amount of money. With this amount, they need to meet their daily needs and also fulfill some desires. They also need to save some amount of money for the future. Children must be explained this in a way which is of interest to them. For eg: at any point in time, if you ask your son/ daughter on what all things they need/ want to buy, it is easy to draw up a long list. Ask them to put the items in order of priority. Then split the items into ones that you will buy for them and others that they need to fend for themselves through their allowances. Of the items that you will buy for them, again decide which all will be bought immediately and link the others to a birthday/ examination/ sports, etc. Of the items that they need to buy, fix the items they can use their allowance to buy immediately and list down the others for which they need to save money periodically.

Income in the case of children largely refers to the allowances that are given to children on a periodic basis. In the early years, the allowance is largely fixed, and as they grow up some portion of the additional allowance can be made variable linked to the children doing some household chores, excelling in fields or even practicing the values that parents want to inculcate in their children.

Some tools that parent can use to help their children understand ‘budgeting ‘ better are detailed below:

If parents want their children to be financially savvy, they must act as role models to their children. You cannot expect children to value money if every month you end up over-spending recklessly and blowing-up huge card bills! Children learn much more from observation than formal education!
Parents can also tell children that money available to them as well as for household expenses comes from the hard work put in by them day after day. And hence build logic of why children’s allowance should be not freely available but be linked to some work being done by them.
Additionally, parents can also explain why the allowance is being given – how it should be used to buy certain specified items. This will ensure children are completely clear how they need to use their monies and also inculcate the habit of planning their spending given a fixed amount of money.
Lastly, parents must be honest with their children on what they can afford to spend on the children. This will ensure that children build realistic dreams and expectations.

Besides, these elementary concepts , there is a whole lot more that children need to know about financial planning and budgeting. They need to learn how to budget their money, effectively manage a checking account, know how to apply for loans and what they can expect to pay for the privilege of using someone else's money, learn what they have to do to make their selves eligible for loans, how to control impulse buying and the list goes on and on.

So, its imperative to start teaching them about ‘budgeting’ as early as possible.