Financial education should be a course taught in schools from middle primary all the way to tertiary education. As a country, the average person’s financial knowledge is lacking at best. Most people would fail terribly at basic financial principles. What is worse is that these people have children and are expected to pass on valuable monetary and financial knowledge to their children. It is no wonder the country is full of people boasting of how they are in the middle class yet they have more debt than a poor slum dweller. Planning for the future & How to create a Financial Plan
This can be remedied by giving our children proper financial education, preferably better than what our parents gave us. These are some of the things I wish my parents had taught me about finances, which I will try to pass on to my children.
- Start Saving as a Child
As my parents were telling me to study hard and work hard, they probably should have added this little principle. The trick is the eighth wonder of the world called compound interest. The idea is that whatever you save is re-invested every year. The interest you get from the principal amount is re-invested the following year as well. This money can be put in a piggy bank and after a few months, it is deposited in a junior savings bank account. Most banks have attractive savings account packages for children. Finances: Teaching Your Child To Save
I remember back in the day we had a piggy bank. After a while, we would break it and use the money on things that did not add much value. There should have been an emphasis on putting the money into a savings account. The reason is that interest is earned if it is in the savings account in the bank and not in the piggy bank. The best way to illustrate this is using an example. Supposing you save Kshs. 10 per day from the age of 10. That is about Kshs. 300 per month. If you leave this money in a piggy bank, after 40 years, when you are 50, you will have amassed Kshs. 144,000. However, if you save the same amount of money (Kshs. 10 a day or about Kshs. 300 per month) and put it in a savings account that gives an interest of about 7% per annum, after 40 years, you will have over Kshs. 740,000! The concept of interest can be simplified for younger children and explained better when they get to their teens.
Young children will not understand the concept of debt until they are older. One of the best times to explain the concept of debt is when applying for a HELB loan. At this time, you can cover interest and how it affects repayment of loans. So many college students use HELB money for social activities such as drinking and gambling. It is important to teach the children that the loan will have to be repaid one day.
As you are tackling the issue of loans, you could educate on the different types of loans and the different types of interest. Banks will charge you anywhere from 17% to 25% interest per annum. If you pay 25% per annum on a loan that takes four years to pay, after the four years, you have paid close to, if not, twice the principal amount you took out. Mobile lenders are more expensive because of the default rates. SACCO loans are somewhat cheaper because some of your savings are used to guarantee the loan. The concept of interest and loans ought to be taught when the children are in their teens since they will have a better understanding.
- Pay yourself first
At some point, parents will entrust their children with some money. I was not fortunate to grow up in an era where children were paid allowances but every now and then, I was given something small for helping out in the house or as a reward for excelling in school. Perhaps my parents would have insisted on me putting aside some of the money they gave me as savings before I went out to buy whatever I wanted. A piggy bank would do for this purpose. Other people even suggest a transparent jar which encourages children as they are able to see their savings grow. As recommended above, after some time, the money in the jar could be put in a savings account if it reaches a certain threshold.
In life, most of the income will go to someone else. Your rent money goes to your landlord. Even if you own the house, you will still pay for utilities: Kenya Power for electricity, Nairobi Water or whoever for water, Zuku or Safaricom for internet etc. You will go to work, so whether you are driving or using public transport, you will buy fuel or pay fare respectively. Anything that you can think of that needs money involves you paying someone else.
Saving is one of the few ways in which the money you give out is yours and you can almost certainly get it at a future date. It is therefore surprising that most of us will pay other people before paying ourselves. There is a reason why you never see your taxed amount in your bank account. It is deducted before it gets there. The Government knows there is no way they will get that money if your employer gives it to you for you to give it to them. Likewise, it is important to develop a culture of paying ourselves first. This aspect is easily developed if started early.
- Spend less than you earn
Anyone can figure this out, but it is important for parents to instil this principle in children. The best way for parents to instil this is by taking children shopping with them. At the supermarket, allocate some money to your child, say Kshs. 100. Ask them to recommend what they would like. If it is more than Kshs. 100, then explain to them that they only have Kshs. 100 to spend. If they pick something that is less than Kshs. 100 (say Kshs. 85) then ask them what they would like to do with the remaining Kshs. 15. Give them options of putting the money in their piggy bank or putting it aside so that next time when you are shopping, they will have Kshs. 115.
The importance of learning this principle is that later in life if you earn, say a million shillings and your expenses are Kshs. 1.1 million, you will have to get the extra 100,000 from somewhere. If you borrow, after a year, you will be Kshs. 1.2 million in debt. On the other hand, if you earn Kshs. 50,000 and your expenses are Kshs. 30,000. It means you can save Kshs. 20,000 a month or Kshs. 240,000 a year. After one year, you are in a better financial position than the person earning Kshs. 1 million and spending Kshs. 1.1 million even though you earn 20 times less than what they earn.
This is one of the most important principles that everyone should learn. The best way to teach this is to involve the children in basic budgeting, especially when it comes to things that affect them. For example, you could sit them down and tell them that they need new clothes that go for say Kshs. 1000, and a new toy that goes for Kshs. 500. The money allocated to those vote heads is Kshs. 1000 for this month and Kshs. 1000 for next month. Ask them for their opinion. Some children will definitely choose toys first. Take this opportunity to educate them on priorities and why they need to get the clothes first. Developing this concept early is important in that it builds up your discipline as far as budgeting and priorities on a large scale are concerned. Teaching Children How To Budget
- Money does not buy happiness
It is crucial for children to understand that money does not buy happiness. Some of the richest guys are also the saddest. There are wealthy people and even celebrities who were famous and could afford almost anything, who have battled depression and even taken their own lives as a result of it. Let the children understand there is more to life than having a lot of money. One of the ways of teaching this is when you need to downgrade a toy or reduce their allowances maybe because you are not liquid yourself. Explain to them that the downgrade is necessary because there is not enough to buy what they are used to. Show them that they can still have fun with the downgrade, or that life does not end when their allowances are reduced.
As someone once said, Money should be seen as a tool, not a means to an end. It is just a medium of exchange. Used properly, money can be a tool that allows you to do good things for both yourself and others. Be grateful for what you have and generous to others who may have less. It’s not the amount of money that you have in your bank account that matters, but the value you create for others in your life.
It is never too late to start teaching children about finances. Here are 7 Ways We Can Teach Children The Importance Of Financial Management. Also, check out this article by Forbes on How To Teach Your Children About Finances…At Any Age – You will have to Kenyanese it a bit because it is based on American culture.