Want to help your children develop good money habits?

If you and your family observe traditions where money is given to children on festive occasions, these cash gifts could be used as a teaching opportunity.

Some parents give their children free rein to spend their cash gifts as they please. For instance, it’s not uncommon to hear stories about kids planning to buy gadgets such as Nintendo Switch with their newly acquired funds.

Many children are also happy to hand their cash gifts over to their parents to manage — these parents may bank the money into their kids’ savings accounts, or use the money for child-related expenses, such as tuition or enrichment fees.

But here’s another approach to consider. June Yong, a local mother of three, teaches her children to apportion their leftover allowance into three piggy banks, for saving, sharing (e.g. donations), and spending. When it comes to her children’s red packet (or hongbao) money, she puts most of it into the bank, and uses a spreadsheet to help her children track the growth of their savings accounts.

However, she also gives each of them S$20 from their hongbao takings to spend on “anything their hearts desire.” Why does she do this?

“I’m not sure if swiftly sweeping the hongbao dollars away into a bank account, safely hidden and out of reach, actually helps a child understand its value,” she says. “For us, it’s important to give our children some form of practice with managing cold, hard cash.”

Her children are free to spend their S$20 right away, or put it towards something they have been saving for. She sees this as a chance for them to learn about spending, and its consequences, on a small scale.

“My seven-year-old wanted to spend about S$15 on a science kit they were selling in school. We had a chat about it — talking about what’s desirable and what’s included in the kit. He was insistent on buying it so we let him,” she says. “Later, we asked him how he felt after he had bought it, and if he thought it was money well spent. He said it wasn’t as fun as he thought it would be.”

Below are other ideas for teaching money lessons, shared by experts and parents.

Explain your spending rationale

Involve your child when you make a big-ticket purchase, such as a car, a new home, or even a vacation.

This is the perfect opportunity for your child to learn about setting a budget for important purchases, weighing the available options, looking past sales gimmicks, and negotiating — or doing the research to score a better deal.

“These are lessons that have a real impact on kids, whether you’re looking for a used Toyota or brand-new Tesla,” says financial journalist and parent Beth Kobliner.

You can start by simply being honest with your children about your financial concerns.

“I was looking online for accommodation for an upcoming weekend family getaway, and my 13-year-old was wondering why I didn’t book the first option we saw,” says a KSP member. “To put it in perspective for her, I showed her that we’d previously spent less or the same amount on accommodation, for trips that were much longer.”

“As often as possible, I’ll also let my kids know how much things cost, either by telling them or letting them look at receipts. If we’re dining out, for instance, and find that we’ve ordered more food than we can handle, we’ll go over the bill and talk about how we could’ve made better choices,” she adds.

Teach kids to budget and save

Sometimes it is good for your child to experience not being able to afford a particular purchase, and needing to save for it. “This is a hard concept for people [of all ages] to learn,” says Kobliner, who cites mortgage foreclosures and credit debt as prime examples that “adults don’t know much about money.”

“To help the next generation avoid the mistakes of their elders, and to live financially fit lives, they need to be taught the essentials about money,” she says.

An oft-recommended way of getting children into the habit of saving is to refrain from buying them everything that they ask for. Instead, encourage them to set a savings goal for a particular purchase, and work towards it by setting aside a portion of their daily allowance.

Your child can add his or her leftover allowance into a piggy bank or savings jar, and you can either track your child’s savings on a spreadsheet, or do it the old-fashioned way, by tallying up the money together on a regular basis. It’s all the better if you can show your child that you too are holding off on certain treats for yourself to be financially prudent. Share your plans for saving — or earning additional income — to afford these treats.

Another lesson that your child will need to learn is that others may be able to afford what he or she can’t. At the same time, he or she should also be aware that your family, too, enjoys certain luxuries that may be out of reach for others.

You can broach this topic by talking about incomes — what you make for the work that you do, versus what others might make for different types of work. This is also an opportune moment to introduce the concept of social inequality, and to discuss how one’s savings could be used to help others in need.

Show kids how to grow their money

Apart from prudent spending and saving, there is another critical money lesson for kids to learn, says Canadian businessman Kevin O’Leary. In fact, it was a lesson he taught his own kids when they were mere kindergarteners, by buying them a glass piggy bank and adding a few coins to it every night while they slept.

“The idea was that they would wake up and see there was more there,” he explains. “That was for them to understand the concept of compounded interest.”

In investments, compounding happens when interest is earned on money that was previously earned as interest. Children entering teenhood would’ve learned about compound interest in school, and you could explain to them that the same principle applies for investments that offer compound returns. For instance, you could show them charts that demonstrate how a small investment sum, such as S$100 a month, can snowball over the decades — proving that it’s important to get an early start for investing.

At the same time, help your children to understand that the value of money changes over time, and that this can either work for or against you. To demonstrate inflation, for instance, you can give real-life examples of what things used to cost in the past, versus what they cost now. Or you could talk about something that you own, such as your home, how its value has (or has not) changed over time, and why this might have happened.

You can also talk to your children about why one might choose to invest in the stock market, the property market, and so on, as opposed to stashing one’s entire savings in the bank, or spending money on something frivolous. Ultimately, what you want your children to understand is the idea that “money makes money,” says O’Leary.