Start Early is the mantra in finance everywhere; be it in planning, saving, investing or anything you come across. Same thing applies when introducing finance to kids also. Children should cultivate the habits of earning money and spending it prudently and multiplying the money in hand.
Cash In Hand
Start with providing them a small pocket money every month and tell them to maintain a small booklet to track the inflows and outflows. As a reward, you can give them additional money if all the accounts are proper. One good way to provide an incentive for saving is paying them a part if they save on the Power bills (by switching off unnecessary lights and fans) or encouraging them to iron their own clothes and paying them a part of the amount that would have been paid to ironing shops.
Kids Bank & Debit Cards
Many banks now a days encourage kids account opening with zero balance facilities and debit card / internet banking facilities if the kid is above 10 years of age. Some of the banks have a transaction upper limit per day/month. Instead of your regular withdrawals, you can transfer a small amount from your account to their account and ask them to withdraw the same for you. This will help them in understanding how the transaction works and also will get a good view of their account increasing and reducing. Also the concept of interest will be new to them and that will help them to save more.
Kids Mutual Funds / Shares
Currently there are no mutual funds which you can start in the name of kids directly, as of now it is linked with parents account and then on attaining maturity kids need to do one more kyc and get full access to it. Not many DPs permit opening a demat account for children as they believe it would not be in their best interest to allow kids being minor (and not having full contractual capabilities) to invest in shares.
However, what you can do is to invest in shares/mutual funds for them in your account itself, create a separate “Portfolio” for them in sites like Moneycontrol and show them their shares and Mutual fund units. They can track their shares/mutual funds and know the increase or decrease in the value over period of time. This will actually create a “own” feeling of investments for kids.
Credit Cards for Children
I don’t encourage usage of credit cards even by the adults who are not able to handle the same effectively. Credit cards, if used in the right sense, is a perfect tool for managing your expenses. Credit cards are generally not issued to children as they don’t have earning capacity and contractual capacity.
However, you can have an add-on card in your name, reduce the limit for the card, restrict international transactions and ATM withdrawals (some banks like ICICI provides restriction of international transactions, ATM withdrawals and also reduction of limit for each card; you can set this up through your internet banking). Your child can use this for making his purchases, of course, under your supervision and the card can be kept in your custody and released to him only when he need to purchase.
Normally, the credit card statement shows the transactions of each card separately. At the end of the billing cycle, you can show him his spending patterns and the need to control the urge in spending with a credit card. You have to certainly devote some of your time in teaching them.
Public Provident Funds
You can open a Public Provident Fund in your child’s name and also have a separate internet banking to view/transact in the PPF. Note that your tax exemption under 80C upper limit will include balance in your child’s account also, so invest by considering the limits.
If you wish to show your child the need for long term saving, you can always show him his account and how the money grows.
Many more ways are there to teach the children how to handle money. If you feel there are better ways and I missed here, please do let me know.