How you can use ang baos to teach kids financial literacy?

Kids of all ages love Chinese New Year (CNY) - there's no doubt about it. They get to feast on delicious goodies and collect lucky ang baos (red packets), after all. 

My 9-year-old daughter, for one, is always very intrigued and excited to receive red packets filled with actual money during CNY. She would collect them from her friend's parents and pass it to my wife and I, wondering if this cash truly belongs to her, and if we will use this money to buy her toys and dresses. 

Since children are largely influenced by their parents; what I choose to do with these red packets will inherently affect the way she manages money later in life. This is why I see this festive season as an opportunity to teach my daughter basic financial concepts, which will help contextualise her thinking around money and decisions involving money. 

Since red packets contain physical money that a child can hold and count, it makes for an even better money lesson. Why, you ask? Well, we live in a world where money tends to be 'invisible', thanks to the usage of credit cards, digital wallets, and mobile bank transfers that are the norm.

Not seeing actual money exchanged for an item or service makes it hard for children to grasp the concept of saving and spending money. They might see this 'invisible' money as an abstract and unlimited resource rather than real money being moved from one bank account to another.

In this article, I share with you my personal experience with teaching my daughter about basic financial concepts, the right age to begin money talk, and where you should save your kid's ang bao money. While this list of lessons wouldn't come close to teaching children all the financial lessons they would need to navigate through life, I do believe that they cover the important ones.  

1. "YOU CAN ONLY SPEND YOUR MONEY ONCE"

Money is a limited resource. Before any other money lesson, your child would first need to understand that once money is spent, it's gone for good. This means, they should only spend money on things that they need. 

You could start by asking them simple questions like - "do you need it?", "will you use it?" or "why is it important to you?". These may seem simple questions, but they should trigger a thought process to help your child tell the difference between a want and need. 

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You could then take it one step further and explore the concept of delayed gratification. If your child has his/her eye on a costly item like a Lego set, rollerblades or PlayStation (seems like toys are getting more expensive these days), make him/her save or work for it. 

Encourage your child to start contributing every month towards the purchase through their pocket money or by doing chores around the house. You could also turn it into an activity where both of you create a simple chart to track the progress of the savings. 

2. NOT EVERYTHING COSTS THE SAME 

The easiest way to teach this lesson would be to get your child involved in the decision-making process on your next grocery shopping trip. Hand them the week's grocery list, ask them to find the items at the supermarket, and then get them to compare the prices of the different brands within the same product category.

Calculate the difference in prices, talk them through the differences between the options available and let them make the final decision (this would also help build their confidence).

3. THE MAGIC OF COMPOUND INTEREST 

They may not yet understand the concept of putting their money in a bank to earn interest and why they should do it instead of keeping their money at home. So, here's a practical exercise to explain the magic of compound interest to your children and, in the process, get them to make saving a habit:

• Encourage your child to put away $1 into their piggy bank every day for a month and document how much she has put in.
• For every $1 she puts in, you put in 20 cents (but not tell her). 
• Once the month is over, open the piggy bank and count how much is inside. 
• Separate what your child has put in in the last month, and how much else there is. 
• Explain to them that the extra is exactly what they would receive if they put their savings into a bank account. 

4. BUDGETING CAN BE SIMPLE AND FUN 

Start with a simple exercise like giving your child a budget to host a party for her friends. Task her to plan the activities, purchase items and prepare the food for that one day.

With guidance on planning, shopping and preparing for the party, this fun and hands-on approach to budgeting will help your child pick up practical organisational and financial skills. 

5. SOMETIMES THERE ARE NO CLEAR RIGHT OR WRONG ANSWERS

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And that is okay. 

Even as adults, we sometimes find ourselves in situations where we have to make the best possible decision, based on the options available. Here's a game that you can play with your kid: 

• Hide a piece of candy in one of your palms. 
• Tell your kid to guess which hand it is in.
• If she gets it right, she gets the candy and two scoops of ice cream. If she gets it wrong, she doesn't get either for 3 days. 

This would cultivate their cognitive skills and allow them to understand how their decisions affect outcomes, and vice versa. 

WHEN IS THE BEST AGE TO DISCUSS MONEY WITH KIDS? 

Start talking to your kids about saving money before they enter primary school because this is when we start giving our kids pocket money for meals, stationery etc. We would recommend the age of 5 when they can perform understand basic math and the concept of money (money = toys/food).

WHERE SHOULD YOU SAVE YOUR KID'S ANG BAO MONEY?  

Don't just stuff the cash in a Milo can or keep it under their bed because they'd miss out on opportunities to grow the money through interest. 

We've compared the different children's savings accounts in Singapore, so you can see which bank will help grow your kids' ang bao the fastest:

This article was first published in SingSaver.com.sg.