Money & parenting: Ever wonder our kids’ psychology of money?
01 Sep 2022
“People from different generations, raised by different parents who earned different incomes…born into different economies, experiencing different job markets…different degrees of luck, learn very different lessons.”
Morgan Housel’s recent book Psychology of Money is perhaps the most incisive take on personal finance in recent times. Our economic realities (scarcity or abundance), the access to information, values that we use for benchmarking have changed drastically over generations and have had a critical role in shaping our money habits. When I track the evolution of money habits in my family – from my father, to me, to my kids – I become more and more convinced about this argument.
People born before the 90’s have experienced scarcity at a different degree than today’s generation.
The most basic amenities like gas and telephone lines were not easily accessible to them – imagine needing a month for a telephone line. Sounds bizarre now! The longevity of their jobs was much higher because opportunities were scarce and there was a relative deficit of self-confidence. My father who worked in the Textile sector, believed he was only good at one thing – textiles.
Me and my generation had the best of both worlds – we learned from our parents’ scarcity and steered towards wealth accumulation and multiplication. The longevity of our jobs has relatively reduced, and we know we can be proficient in 5 other professions.
Today’s generation is far improved on all measures, because they have abundance in choice – of education, jobs, sources of income, etc. They have equal access to information, and they are benchmarking their abilities against a global measure. They are aware they have multiple career choices and information has not only built their confidence in general, but also empowered them to spend easily. Consumption is a way of their being than conservation.
To put it differently, my father who was born at a time when opportunities were rare and entrepreneurial aspirations weren’t the norm of the day. Consumption was reserved primarily for unavoidable expenses. My daughters, however, enjoy a different level of spending confidence because they were born in the digital age which offered them ease of access to everything. Where patience was a virtue for my dad’s generation, my kids value a more real-time approach. FDs and savings plans were the preferred financial instruments then, and cryptos are the flavour of the day now.
What must our kids know about money?
a. Want vs Need:
Understanding the difference between luxuries and necessities is critical. It can only be achieved through self-discipline. A simple method is to budget your money – allocate a certain percentage of your money to savings and the remaining for discretionary spending. Remember that your savings should account for a higher sum than your expenses.
b. Live within your means
Resist the urge to do impulse spending or rely too much on credit. Document your spending in the past few months and you will realize which expenses are truly critical and avoidable. Relying disproportionately on debt to create a lifestyle you cannot afford can lead to untenable financial problems in the long run.
c. Grow your money
Consumption in important. We must enjoy our hard-earned money while we can enjoy it. But it is not ideal to throw caution to the wind and fall into the ‘YOLO’ trap. Consumption is important no doubt, but it must be done smartly. Saving a part of your income and multiplying it for future aspirations is equally critical.
d. Be smart about Debt
As you progress through life stages, it is impossible to not create some debt. Affordable debt for necessary upgrades to your life is good. If your income can afford it, buying a house and a car through debt are good choices. But racking up a massive debt for discretionary choices like buying a second house are bad decisions if your income can’t support it.
What Parents must do better?
We must start recognizing that our children are responsible and value-driven. Bad money habits are easy to catch – who here didn’t suffer from stupid financial mistakes when they were young? Firstly, it is important that we model good financial behaviour for our children. The way a lot of us have learnt to save was through our mothers who kept aside some money every month in gulakhs and kitchen utensils. Now, we barely talk about money with our children. But kids are smarter than we think. We must talk constructively and openly about money. Because the only place everyone learns money habits is at home. When you make financial planning inclusive, it is easier to pass on good habit to our kids. From Budgeting to Bad Debt, they will learn without realizing it. We often undermine the connectivity between Money and Parenting. And it is about time we realized that it is not taught in schools but learnt silently at home!