The focus of teaching about money to children should revolve around concepts of:

Earning / Income

Children should be explained the concept of earning very simply. Earning means money that a person gets for rendering some services or products. For eg: your 7- year old daughter may like her friend's doll and wishes to exchange it with hers. If she does that, it is called barter. But if you promise her that she will get Rs.500 if she comes 1st in the school painting competition and she does, she has earned that money. The prize that you give her is in lieu of the happiness that she gave you by excelling at school activities.

When children earn some amount of money, it creates a sense of pride & respect in them. They not only understand the value of money but also start appreciating that every good thing requires effort. So, if they have 3 free hours in a day and have the option of watching TV, playing games or sleeping, they may make the choice through which they hope to earn maximum money.

The concept of earning also created a sense of healthy competition among children. As a child, my grandfather used to reward my brother & me everyday for the positive remarks that our teachers used to give on our homework. Rupee 1 for a 'good', Rs.2 for a 'Very good' and Rs.5 for an ' excellent' remark. Similarly, Rs.1 was deducted for ' average' and Rs.2 for ' poor' remark. Soon, both of us were striving to earn as much money as possible and out-do each other. This led us to spend more time on our homework and ensure that it was perfect; sometimes even at the cost of sacrificing our playtime. It also in some way explained to us the concept of money and its value!

Spending

Children can use the money that they earn to buy things that they like. This way, they can be introduced to spending. The incentive given to children is simple. All the money that they earn by coming 1st in class/sports or for keeping the room clean or drinking milk in the morning can be used by the child to buy his/her favorite toys which otherwise are not readily accessible.

Explaining the concept of spending must be dealt in a careful way. Children must learn how to spend wisely. This means that even though they have some money at their disposal to spend as they want, they still must make choices since the amount of money is limited. Parents should provide controlled freedom to children in this matter. For eg: your child may have Rs. 300 earned and would like to spend them buying chocolates. However, that is a complete waste of money and is not even healthy for the child's teeth. Here, as parents you must intervene and explain ' spending wisely' to the child. He/she should be cajoled into using the money to buy that 'special game' that he/she had been eyeing closely for the last two months.

While explaining the concept of 'spending wisely', children should also be introduced to the differences between wants, desires & needs. The child may desire a Sony Play station at the age of five and may want a dollhouse but the need of the child may be to have a new special bed. In such a case, although difficult, parents need to explain how they cannot afford to buy all the three things for the child at the same time since money is limited. They also need to explain how the Sony Play Station is beyond means at present and how the bed is most important. They should convince the child that they will buy the bed immediately and how that will be a great show-off thing for the child for his/her friends. They can link the purchase of the dollhouse & the Play station to some achievements of the child in due course of time.

Saving

Children must be introduced to the concept of saving very early. Saving means keeping aside some amount of money earned at present for future use. Parents should be gift a 'piggy bank' to their children and encourage them to put money in the piggy bank whenever they get some money. This way of collection of money will help children learn about saving in a passive way. Parents can even create a goal in the child's mind for the amount of money collected and if the child manages to collect that much amount, parents promise to contribute the same amount of sum to the piggy bank. Hence the money will double up and will work as a great incentive for the child. This money can in turn be used to buy a gift for the child.

The concept of saving goes hand-in-hand with the concept of spending in a planned manner. Rather than giving adhoc sum of amounts to children for their random expense like candies, ice-cream at school, parents should give a fixed amount of money for a week or a month and inform the child that this money needs to be spent over the fixed period of time. And in case, the child finishes his/her allocated amount of money earlier, then he/she will have to stay without money for the remaining period of time. This planning will lead to responsible expenditure by the child and the child will not end up spending the entire sum of money is the 1st few days. Most likely, such planned spending will induce some savings.

Parents should always encourage & praise children's' efforts of saving. For eg: if your son wants to gift his younger sister a small cake on her birthday, you should encourage him to collect money for the same rather than financing it from your side. This is a two-fold benefit: one, it will give your son a goal to save for and second, it will be a matter of great affection and pride for the siblings and you as parents when your son gives the birthday cake to his sister from ' his own money'!

Borrowing

While teaching children about money, they must be made to understand the negative habits of money namely borrowing. Borrowing is just the opposite of saving - taking others money to spend for one's own use right now and repay the other person later.

Children must be explained how 'bad' borrowing is. For eg: your son likes his friends' water bottle and borrows it from him. Parents must then explain to him that by borrowing someone else's bottle, he has taken an obligation from the other child and he will need to repay the same in some manner in the future. It is possible that in future, our son has a very nice toy and this friend asks for it; in which case he will not be able to deny, having earlier borrowed his water bottle. Children must be dissuaded from borrowing anything from anyone.

This can be done only when parents instill confidence in their children that they can fulfill all their children's desires and their children can openly discuss their needs with parents. Encouraging open discussion on monetary matters with children will ensure that children do not borrow from external people to fulfill their needs/ desires.

Parents should also explain to children that borrowing of objects or money always needs to be given back to the real owner. Hence, children should always save some amount of money that they earn for any urgent need later on. If they do not save regularly, then in times of urgent need, they will have to borrow money from others.

In this day & age of remote Banking & spending on plastic rather than cash, often parents get into an overdrive of explaining modern concepts to children. However, in the formative years of 6 - 10 , children should be introduced to the basic concepts of money and principles. They need to first start appreciating what money is, how it can be earned, why it should be saved, how money should be spent wisely, etc. Only then should they be introduced to the new formats of money - credit & debit cards and access channels of ATM, phone & Internet banking. Parents who introduce their children to credit cards without inculcating the value of saving in them run the risk of children growing up as financially irresponsible adults. Similarly, unless children understand the concept of 'brick n mortar' bank, explaining remote channel banking will lead to incomplete education.