02-08-2022 |
Childhood is the period of carefree living and making joyful memories. Along with the fun and frolic, it is the time to learn essential life skills not all of which are taught in schools. Just as children are savvy about picking up the nuances of technology effortlessly, they should be financially literate too. We live in uncertain times and our children need to be able to adapt to these times by understanding how to manage their finances well. The traditional piggy bank is the beginning of personal money management and teaching your kids the importance of savings and having a savings plan.
It is not enough to merely adhere to the conservative approach towards spending money that people from earlier generations usually treated as money management. These days, new savings plans and earning opportunities, for instance, a guaranteed1 savings plan, are available. To make effective use of such instruments, children should be aware of a few basic principles of investment. With a good basic knowledge of these guidelines, they can make confident and informed financial decisions when they become adults.
What is Money Management?
The fundamental principle of personal finance is to optimise the value of your earnings and assets. Put simply, we should seek to fill our financial basket with the most useful products that are chosen according to a balanced set of criteria. In this context, we should consider factors such as the protection of our capital, risk-adjusted returns, liquidity, and insurance. The overall objective is to build wealth through savings and smart investment.
How Can You Become a Smart Money Manager?
The first step of money management and smart investment is developing a few healthy financial habits. Budgeting your expenditure and planning ahead for expected future commitments are a given. When you spend wisely, you save more.
You should develop the practice of setting apart a percentage of your earnings to your savings basket; ideally, this figure should stand between 30%-40%. How the funds you save are distributed amongst various savings and investment products, depend on your life stage and the time horizon for your commitments to emerge.
Therefore, you should direct your savings funds towards insurance plans, fixed income securities, growth plans, and wealth-building products. It is profitable to start early and remain consistent in your investment approach. However, it is equally important to be adaptive and flexible to incorporate changes in your financial situation as well as the performance of your selected investment options.
Monitoring the performance of your investments and making corrections as you go along is likely to maximise your returns.
What should kids be taught about money management?
Children begin to realise the importance of money from an early age. For instance, when parents deny any of their requests, they tend to associate the power of money to satisfy needs. However, looking at money as a factor that deprives them of good things is not the ideal approach either. Children should be taught that financial health is just as important as physical and mental health and should be a lifelong pursuit.
Here are four things that kids must know about money management to develop a positive mindset about money.
1.Monitoring where their money goes
The habit of tracking expenses and checking when they become excessive or unnecessary should be inculcated amongst children at an early stage of their lives. This habit has two benefits: unplanned or impulsive buying can be curtailed and seeking value for the money that is spent becomes a habit. This will eliminate the development of the mindset to resort to risky borrowing or dependence on loans during a financial crisis.
2.Time value of money
Children should be taught that it is prudent to start saving early and use the power of compound interest to ensure higher returns. Inflation, over time, has an adverse impact on the cost of living and so the importance of how a small but consistent amount of savings from an early age can bring substantial returns should be taught. The knowledge on the time value of money also teaches kids the fact that repaying a loan entails a higher outflow than the principal by way of interest.
3.Never put all the eggs in one basket
To input money in only one kind of investment is not only suboptimal but quite risky as well. Children need to know that financial management is not akin to hoarding grains like a sparrow does for rainy days. The money that is saved should be properly channelised in various savings plans to derive the maximum possible returns.
Children tend to learn from and replicate the behaviour of their parents. Therefore, parents should demonstrate healthy money management habits through their actions and words. Furthermore, kids should be included in family discussions on how to plan for expenses and save unnecessary outflows of money, and the pros and cons of new investment opportunities.
How does Life Insurance with Returns Help in Money Management?
Life insurance is an essential component of financial planning; it is no more just an instrument to provide financial assistance in the absence of the primary earning member of the family. The insurance industry has evolved to meet the ever-changing needs of customers.
Tata AIA Life Insurance Company has developed products that meet the varied saving needs of individuals. The life insurance returns from a plan can be tailored to match your goals, including children’s education, regular monthly income for a non-working spouse, endowment creation for big-ticket expenses like weddings, pension for post-retirement living, and wealth building through equity investment.
Let us see how the features of TATA AIA’s Life guaranteed1 savings plan are appropriately matched for the funding needs of a diverse set of customers:
- The flexibility to receive monthly income or annual income
- The option to have joint life coverage in one policy
- The flexibility to include additional riders# for enhanced benefits
- The option to choose the mode of premium payment, namely, a one-time payment or monthly, quarterly, semi-annual, or annual payments
- The income period can be between 20 to 45 years
- The benefit of tax* relief under the applicable sections of the Income Tax Act, 1961
Conclusion
It is never too early to start learning about personal money management. Even without an overburdening knowledge of numbers and formulae, children can be made aware of the ground rules for living a financially healthy and disciplined life. The need to be disciplined in spending and saving should be clear. Furthermore, learning the importance of the safety of principal and returns with tolerable risk can help them make sound financial decisions in the future.
L&C/Advt/2022/Jul/1727