Financial lessons the young can bank on

Adding value to your money

Essentially, money comes from two sources of income: 

Work (salary) and investments. We work for our money and we can put our money to work.  

Investment is employing money to work for you, but in order to do that you must save so you can invest safely. 

Saving in general is important so you don’t lose resources, acquire assets and have more income.
If you don’t save and invest, you may end up depending on only one source of income (your salary), which leaves you in a precarious position.

In addition — as you get older — with no assets or investment, you may struggle to adjust to living on a reduced income.  

Pensions are typically only 70 per cent of your last income, so for people retiring without any additional savings/investments, retiring may have a significant effect on their standard of life.

“Nowadays, people are spending so much money and they’re also pushed to keep spending more on many different brands, and when someone keeps doing this it will cost them later on. 

How to be smart with borrowings

1. Resist the temptation: Borrowing is something that can be extremely tempting. However, before borrowing and to ensure you borrow with good reason, always ask yourself the following questions:

Do I really need to borrow and how will it affect my life in the long term? For example, if you take a two-year loan to refurbish the house, how will you feel in one-and-a-half-year’s time when you are still paying off the loan? Make sure you can answer, ‘Yes, it will still be worth it at the time’ with confidence.

2. Are you borrowing for a short-term want (for example, a personal loan for a vacation) or a long-term need (a student loan, a mortgage for a new house)? If it’s a short-term want, consider saving in advance or looking for a more affordable option.
If its a long-term need, take your time with the decision. Think carefully about how it will affect your life and do not make rash decisions.

3. Do you already owe money and are you in control of your existing payments? Aim not to borrow more than 30 per cent of your yearly net income.

4. How will borrowing affect your budget and current expenses? Be sure you can afford the payments now and in the future and can still live comfortably, save and prepare for emergencies.

5. What are the charges and fees at different banks? Did you shop around for rates? What are the consequences if you do not make your payments? Make sure to read all terms and conditions at the bank before agreeing to sign the contract.

Information on Teaching financial concepts to children

Teaching financial concepts to children

You should present budgeting and financial planning to the young ones in practical concepts

Parents know that modeling can be more effective than teaching in getting results with their children. This goes for almost everything from manners to money management.

Preaching the importance of saving to your children, for example, won’t work unless you don’t present a good role model. The small actions you take on a daily basis form your child’s perception of sound money management, how to make financial decisions and how to set priorities.

That doesn’t mean that you should involve a young child in setting a household budget, but you should present budgeting and financial planning to the young ones in practical concepts and actions that apply to their own daily lives.

Get them to make decisions about some of their own purchases. Let them own these decisions and manage small budgets when you’re shopping for treats, toys, books, etc. When children are offered an opportunity to participate in making money decisions rather than just requesting purchases, they become familiar with why the decisions are made and more likely to accept them.

Here are few concepts to focus on.

Affordability

Telling a child that you won’t get a certain item for yourself, the family or the child because you don’t want or you can’t is unproductive. Talk instead about the concept of affordability. There is a difference between wanting something and affording to get it. Affordability puts the item within the context of the household’s means as well as the time frame. For example, something may not be affordable now, but you can save up to get it later. Or another thing can be simply unaffordable.

By differentiating the items that are desirable but unaffordable from unwanted items, your child should learn that a parent’s “no” has more than one reason. Similarly, this child should be able to grow a skill to control impulse shopping thanks to the training on taking affordability into consideration.

Value for money

Explain why simple money decisions are made. You may choose to spend Dh100 on groceries but not on toys – basic needs versus luxury. Similarly, you may decide to buy a toy for Dh50 but not another at a similar or lower price because of the quality of the toy, its educational value, durability, etc.

Again explaining the basic factors – like quality, use and durability -- that contribute to the making of a money decision can be more helpful to a young mind than a simple “yes” or “no.” Keep in mind, however, that you should avoid discussing the value of the item itself from an adult perspective. In other words, your perspective is certainly different than your child, so recognize your child’s need and focus on more objective aspects such as how the item is made, whether it will work properly or not, etc.

Priorities

Even preschoolers may be able to set priorities. If you’re clear that you would be able, for example, to buy only one item at a certain amount of money, you probably will make it their job to find this item. That strategy helps you avoid the discussion later when a long list of items if requested. In addition, your child should be able to think about the different options available and make sacrifices and compromises.

You may need to hold their hands through the process for a while, however. Ask questions like what they like about each item, what they would rather have immediately and what they can wait, etc. By doing so, you get them familiar with how to make decisions now and later. In addition, you avoid the total meltdown that most parents face when they are the sole decision maker. When children own their decisions, they learn that there are consequences. For example, getting the wrong item means an opportunity for a better item is gone