Should you give your child pocket money or start a savings account?

Sohail’s son is 10 and wants pocket money. As parents, Sohail and his wife feel that giving him pocket money would help him learn money management. They want to follow the usual practice of parents giving their children pocket money and telling them to meet their expenses with that, in turn educating them about saving, budgeting and dealing with money. However, Sohail’s adviser recommends a savings bank account for the child to educate him about money. Sohail wants to know if such accounts are indeed helpful in teaching children about finance?

A bank account can take money lessons much farther than pocket money and enable better management of personal finances as an adult. A bank account may be able to take away the drudgery of writing down accounts, and replace it with review and tracking that can be exciting to a child.

Tracking the account balance and finding it increasing or decreasing is likely to not only get young children excited, but may also help them introspect about their spending and saving habits. The pocket money can be credited to his account on a monthly basis, along with any gifts or earnings.

Moreover, he will be able to see how money can be put to work by keeping it in a bank account and how it earns interest income. The minor-operated bank accounts come with various checks and balances that the parents can put in place. In order to keep a tab on spending, daily and monthly spending limits and withdrawal limits can be set on debit cards.

Sohail and his wife can choose the account depending on how much transaction limit they want their child to be exposed to and make the spending limit known to him. They can also check the passbook or an online account summary of their child fortnightly to understand where and how much has been spent. They can take him through the schedule of charges before opening the account and explain the situations when these can be levied. They should tell him about the need to maintain a minimum balance. All these would inculcate a sense of monetary discipline in the child.

Children of Sohail’s son’s age can start saving their cash inflows into these account which keeps their money safe, provides interest and allows them to withdraw money up to a limit through a debit card. Such savings accounts will prove to be the stepping stone for discussions on investment options and other financial concepts, which can be gradually introduced over the coming years.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)