The Financial literacy of children and young adults is founded on fiscal responsibility. At a young age and all the way up until their early to mid-20’s, it is unlikely that your child will be required to engage in active investment strategies. Because of this, the majority of the benefit you could derive in teaching them about money and economics will come from the time you devote to teaching them simply to remain fiscally responsible. Once a person learns to live within their own means and not be wasteful with their money, it is not only a skill that often remains throughout their entire life, but it is something that can always be relied upon (in contrast to knowledge of investment strategies, of which none are 100% successful).
Fiscal responsibility starts with proper budgeting; knowing what money you have, where it goes, and for what reasons. However, budgeting is not always straightforward to teach children because either the math is difficult and intimidating, or just wholly irrelevant to them and their world (children have a difficult time grasping the necessity of paying one’s utility bills). That said, for some of the more math-inclined it could be a fun exercise to work through their projected budgets.
Rather than breaking out the excel sheets right from the start, one of the most impactful lessons to impart on children of all ages is the difference between a need and a want. This actually forms the basis of the future more technical discussion about how to make a budget and deciding how to spend their savings. Without really understanding the crucial distinction between something they truly need, versus something they just want, any future lessons about fiscal responsibility could fall on deaf ears.
A good distinction to clarify when teaching about needs and wants, is that a need is something that is imperative for survival. It is important to not confuse a need with a “really really want”. Fortunately for us, a great many needs in life are free. Fresh air and exercise, as well as some of the more intangible needs like companionship or having a purpose in life all technically cost nothing. However, most of the things we need in life, and almost all the things we want, are going to cost money.
Here are some examples to help you teach the difference between needs and wants:
-Basic Utilities (water and heat, not cell phones)
-Savings for a rainy day
-Computers and TVs-Candy and Sweets
-Comic books and toys
One exercise would be to talk about all the possible things that the family both needs and might want. Without going into detail about the actual family budget of course, you should be able to have a conversation about basic fiscal responsibility from here. For instance, you could ask them: what would happen if the family spent all its money on electronics? What money would then be used to pay for food at dinner, or for the heater at night when its cold? You can explain to them that as much you also want to go out and buy all the toys in the world, you have to be smart with how you spend your money. Kids are sharp, and can quickly pick up on the idea of not being wasteful.
From here this opens up the possibility of speaking about slightly more complex issues of fiscal responsibility and the tricky items that can fall into both the needs category and the wants category. These are arguably the most important to focus on and teach at a young age, as these grey-area items end up being opportunities for fiscal irresponsibility later in life. For example, you can explain to them how a car could be a need. You may need a car to get around town, perhaps to take them to school or get you to work. This begs the question though, what kind of car? You could ask them if a car is a need or want. Then, as a followup, ask them if a brand new expensive sports car is a need or a want. This of course is not to discourage them from working hard, sacrificing, and aiming high at an attainable goal. They can still hope for the sports car one day, but step one is recognizing that it is still just a want; and the need comes first.
It is unlikely they will be in the market for any car during this conversation, and child labor laws tend to prevent children from being the ones responsible for putting bread on the table, so discussions about the nitty-gritty needs could be difficult for them to empathize with. You could then instead illustrate an example more applicable to their own life. Try to think of something that clearly and unequivocally is related to their life, and that could qualify as both a need and a want. Children need hobbies and opportunities for developing social bonds, so perhaps something sports related could fall into this category. He or she may need a basic football, some cleats and shin guards, but the fancy expensive equipment and the shiny brand name sports bag are just wants. Perhaps he or she is a lover and creator of art; in this instance a basic colored pencil set is a need and an extensive array of fine oils would be the want. In each of these cases, it is important to try to get them to come up with the examples of each need and want themselves.
After having these sort of discussions, it is quite helpful to then reinforce these principles when out and about in the real world. Perhaps they are out shopping with you, whether it’s walking through the grocery store or the BIC Camera, you could point to random items and ask if it is a need or a want. You could even turn it into a game whereby if they get enough points by the end of the shopping trip they get some kind of reward. This of course would be a two-for-one, as now you are teaching them about economic incentives! If for example due to work, you do not have an opportunity to go shopping with your children, you can play the same game thumbing through shopping magazines.
After building up a solid foundation of fiscal responsibility starting at a young age, you as a parent should be confident in your child’s ability to make wise purchasing decisions throughout their life, at least most of the time.
[ Sources ]
– Jorgensen, Bryce L., and Jyoti Savla. “Financial literacy of young adults: The importance of parental socialization.” Family relations 59.4 (2010).
– Johnson, Elizabeth, and Margaret S. Sherraden. “From Financial Literacy to Financial Capability smong Youth.” J. Soc. & Soc. Welfare 34 (2007).
– Lusardi, Annamaria, Olivia S. Mitchell, and Vilsa Curto. “Financial literacy among the young.” Journal of consumer affairs 44.2 (2010).