How to talk to kids about money

“Can’t you put it on your credit card, Mummy?” I cannot remember whether the ‘it’ in question was a pricey Lego set or a Dh10 banana, but the shock has lingered much longer. How did my 6-year-old daughter know that if cash was in short supply, reaching for a credit card was even an option?

I shouldn’t have been surprised. Children are endlessly inquisitive, and opening my wallet to scatter its contents across the floor has been one of my daughters’ favourite games since they were toddlers. How many times had I told them not to lose the valuable notes, coins or brightly coloured plastic cards? What I couldn’t remember, however, was telling my youngest how cash or credit works – and that’s a common parental failing. Here’s how to do the right thing and teach your children about money.

Talk isn’t cheap

Financial literacy is a learnt skill, but when was the last time you made a concerted effort to sit down and talk with your children about managing your money? As daily life become increasingly cashless thanks to debit and credit cards and contactless payments, children could be forgiven for thinking that money is a limitless resource, on tap as if by magic to buy treats at the mall, unless you show them otherwise. Whether it’s playing shops with plastic coins, agonising over the best deals in a supermarket aisle, booking a holiday online or double-checking your bank statement, it’s time to talk about your financial decision-making.

It’s never too early to start

Children have surprisingly little financial education in primary school despite the fact that they form attitudes to money early in life. A recent study by the University of Michigan Centre for Human Growth and Development found that children as young as 5 showed emotional reactions to spending and saving that predicted their behaviour with real money; in other words, some spent the dollar the researchers gave them and others saved it. Buying a piggy bank with separate "save", "spend" and "share" coin slots is a good way to introduce crucial concepts, including charitable giving.

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And it’s never too late

How good are you with your own money? If you're a hopeless spendthrift and cannot budget or save, it's likely that your children will mimic your behaviour. So do their university fund a favour, pick up a good book, such as Make Your Kid a Money Genius (Even If You're Not) by Beth Kobliner, and resolve to do better by example.

How much is too much?

Whether it's pocket money, rewards for academic effort, a generous auntie or flashy tooth fairy, most children will have dirhams in their pocket by the age of 5 or 6. But how much is enough when it comes to an allowance? There's a rule of thumb that suggests giving Dh5 for every year of a child's age, but that's more about convenient denominations of currency than how much any desperately wanted toys or treats actually cost. To make the idea of saving rewarding and therefore persuasive, a child needs to put money away over a stretch of time to build self discipline – but not so long that the exercise feels futile. Help your child to work out how long they will take to save for what's wanted to manage their expectations.

Let them go solo

Young adults are better at managing their own money and less likely to lie about mismanaging it if they have been allowed to save and spend it without parental guidance. That’s according to an annual survey of American parents with children ages 8 to 14 and their children by T Rowe Price, a global investment management company. As hard as it is to sit back, it’s important to let children misspend their money so that they understand the consequences of poor financial decision-making.

Make them use cash

Opening your wallet and handing over bills is a much better way to understand how not to overspend than swiping a debit card charged by mum and dad, according to author and journalist Kobliner, who has three children and has been writing about personal finance for three decades. A landmark study by MIT in 2001 showed that people spend twice as much when they use credit and debit cards as opposed to cash – a phenomenon put down to "the pain of loss". If your child has limited funds and no recourse to credit, they immediately have to budget, make decisions about what they can afford and even put back items when the money runs out: all immensely valuable life skills. As Kobliner also points out, it won't make you a hugely popular parent, but then, what else is new?