Time to think much beyond the piggy bank

There are a few financial products in the market that children can handle themselves

Parents need to start teaching kids about the importance of managing money at an early age,” said investment guru Warren Buffett. This was his answer to a question on what he thought is the biggest mistake parents make when teaching their children about money (see http://goo.gl/00wW4S ). “Sometimes parents wait until their kids are in their teens before they start talking about managing money, when they could be starting when their kids are in preschool,” Buffett said. 

How many of you have started teaching your young ones the importance of money? Or better yet, told them about how financial products work? The usual practice is that parents give their children pocket money and tell them to make do with that for their “expenses”. As a parent, you may argue that there aren’t any financial products that children can handle—many adults find financial products complicated themselves and have burnt fingers in the process. 

While it is true that there aren’t many products simple enough for children to handle, financial planners say that parents can start small—take your kids with you to the bank, for instance. Letting children experience certain things is the best way of teaching them. 

First steps 

Bengaluru-based financial planner Anil Rego is slowly and steadily teaching his 13-year-old daughter about finances. About two years ago, he took her to the bank to open a fixed deposit for her. “I made her fill in the know-your-customer (KYC) form and even made her deposit the money at the bank. I even made her invest some money in an equity mutual fund. She filled up the forms for the mutual fund investment as well,” said Rego. These weren’t big investments; about Rs.5,000 in each instrument. Before going to the bank, Rego had explained the concepts of interest and risk to his daughter. “I had simplified the concepts. She now has an idea of how her investments have been doing. Soon I will teach her the concept of systematic investments. My main objective is to make her understand the value of money,” he said. 

The 13-year-old now has a fair idea about how her investments are doing. “Initially, when the money was invested, she knew that her fixed deposit was doing better than her mutual fund. And now, her mutual fund investment is doing better.” Rego plans to share similar knowledge with his sever-year-old son when he turns 10. 

There are many products out there. Which ones should parents choose? “Banking should ideally be the first product to be introduced to children. You can start as early as when the child is in primary school. You can start by taking them to the bank and then telling them what all should be filled in different forms. When they are a little older, you can teach them how a recurring deposit works,” said Steven Fernandez, a Mumbai-based financial planner. By the time they are teenagers, you could talk about compounding, systematic investments and even other instruments such as stocks and mutual funds. 

Banking with your child 

The Reserve Bank of India, in May last year, allowed banks to let minors above the age of 10 years open and operate bank accounts independently. Earlier, minors were not allowed to operate their accounts independently. 

The central bank also stated that a minor of any age can open a savings, fixed or recurring bank deposit account through her natural or legally appointed guardian. Till recently, a minor’s account could be opened with only the mother as guardian. 

Many banks offer such savings accounts. To open such an account, the parent needs to have a savings account with the bank. You will also need to give a proof of the child’s age and your (parent) KYC. 

These savings accounts come with debit cards that can be used by a minor child above the age of 10. 

These accounts also come with a cheque book facility. Banks such as State Bank of India (SBI) even have mobile banking facilities with these accounts. You can open recurring or fixed deposits along with these accounts. 

If there is a transaction to be made in your child’s savings account, let her accompany you to the bank or let her sit with you and watch while you make the transaction online. Later on, you could help them fill out pay-in slips or cheques or let them transfer the money to their accounts. 

Gaining ground 

According to bankers, the response to such accounts has been encouraging. But is there a right age for children to use banking products independently? 

“Children are displaying more astute understanding about banking and this is evidenced in the popularity of our Kids Advantage Account in the Bank,” said Nitin Chugh, head-digital banking, HDFC Bank Ltd. “It is only natural that usage and independence, albeit under parent’s or guardian’s supervision, will only increase awareness about responsible banking in the segment. The right age to understand and implement practical banking, according to us, is seen in children above the age of 12,” he added. 

The most popular features of such accounts are the automated teller machine (ATM) cards and recurring deposits. “An ATM card is the most used product among all the offerings in the age group of 10 years and above. Parents are also choosing recurring deposit for their new-born children. Among children younger than 10, the usage is primarily by parents on behalf of their children. But in the above-10-years category, especially in urban areas, parents are encouraging their children to learn banking, use ATM cards and so on,” said K.A. Babu, head-retail business, Federal Bank Ltd. 

Usage varies across banks. Axis Bank Ltd’s official spokesperson, for instance, in an emailed response, said that at present, their children’s accounts are primarily used as a savings or investment vehicle by parents on behalf of their children. The debit transaction trends seem to be lower on all channels—ATM, shopping, or at bank branch—as compared with regular savings accounts, he said

Mint Money take 

When opening such an account, do spend some time to look at how much minimum balance needs to be maintained—some accounts may not have this requirement at all. For instance, with HDFC Bank Ltd’s Kids Advantage Savings account, you need to maintain an average minimum monthly balance of Rs.5,000, for Federal Bank it is a quarterly minimum balance of Rs.1,000, whereas for SBI you do not need to maintain this. 

These accounts also have a much lower per day limit on debit or ATM cards. For instance, the debit card that comes with Axis Bank’s Future Star Savings account has a daily limit of Rs.1,500 withdrawal at ATMs and Rs.1,000 at point-of-sale terminals. Compared with this, with the bank’s Easy Access Savings account, one can withdraw Rs.40,000 from ATMs and do shopping transactions worth Rs.1 lakh in a day. 

The daily limits of different banks on children’s accounts range from Rs.1,000 to Rs.5,000. 

Many parents believe that money concepts and products should be introduced when a child grows up enough to understand it. 

A majority of us have had to learn the hard way about financial products, the risks they entail and how they function. Do you want to throw your kids in the deep end of the pool like you were? If not, it’s better that you start early, and start small.