In simple terms, Financial literacy is defined as the ability to make effective monetary decisions and financial plans based on the knowledge and information at your disposal. On a personal level this can mean being able to balance a checkbook, understanding how basic banking functions work, and knowing how and when to file standard taxes; as well as range of other useful skills. Although the need for financial literacy has entrenched itself into virtually every major aspect of our lives, the subject is often glazed over at school, if brought up at all. In the US, less than half the states have any requirements to discuss financial topics in the curriculum, and only four states require high school students take a personal finance class.
While literacy is a fundamental element of a standard education, financial literacy is almost completely left by the wayside. In addition, many parents also find it difficult to talk about, or even bring up the subject of money with their children. This could be for any number of reasons, but most often because they themselves are not experts in the subject of money management, investments, or taxes.
The good news is: this is okay. You do not have to be a professional financial planner to introduce to your children proper money management fundamentals. They are unlikely to ask you about the differences in tax treatment against the risk adjusted returns of qualified dividends and interest on a corporate bond. The bad news is: is if you do not teach them about money, someone else likely will. Teenagers and young people tend to receive much of their influence from their friends or from entertainment. For instance, they might hear from a friend that people only get lots of money by being lucky or cheating the system; and this could foster an unhealthy disposition towards success and those who are successful. An idea that only the lucky cheaters find success could sap their motivation, or worse lead them in the wrong direction. Popular entertainment tends to paint as evil any form of investing or money management, while at the same time glorifying frivolous spending on transient trinkets. Instead, it is worthwhile to reinforce that while there are some lucky cheaters out there, the vast majority of wealthy people become so through hard work, systematic sacrifice, and making plenty of smart decisions with their money. In addition to these concepts, teaching them basic financial skills along the way will help empower them to make wise decisions with their money throughout their lives.
Financial Education For Children
With youngerchildren, it can be a good start to simply introduce to them the concept of money. It is an easy habit to fall into for kids; reaching into their own pocket and putting on the counter an indeterminate wad of papers and coins to make a purchase. Here money becomes, and can sometimes remain throughout adolescence, a blurry abstract concept that is exchanged for things they want. Instead, early on it is advisable to teach them about the value of money, starting with the different bills and different coins. You could play games with them, teaching how multiples of some coins can add up to others, and so on. This begins to form the concept of money into something more concrete. From here it is useful to introduce the ideas of earnings, spending, and savings. Without going into detail of course, you could explain how you go to work, and at the end of every month receive your income earnings which are then used to pay for the things the family needs, as well as put aside some savings. Most parents are surprised to discover that even little kids quickly figure out the concept of earning, and may ask you what they can do to earn some money. So, have some chores ready. Most parents also come across another interesting phenomenon once children start to understand and appreciate the value of money. When it comes time to decide whether to purchase a toy or some other item, if the purchase is made with mom or dad’s money then they simply must have the toy, but when they have to spend their own money that they earned, they might be less enthused to spend it on something of secondary or tertiary importance. True, saving a few dollars on a plastic trinket they do not need (when there are plenty at home) is not likely to put them over the edge and achieve success in life- however, it could for example, instill a strong discipline that saves them thousands of dollars a few years down the line when they decide they do not need a brand-new car, and that a used one is just fine.
How Can You Teach Children About Money?
Once they are a bit older, around their teenage years, the financial literacy instruction can become a little more serious. At this stage they are old enough to start learning about the different types of income, budgeting, and investments. Depending on the local laws, they could be old enough to get a part time job after school or over the Summer holiday. Few things in life teach respect for money and hark work like a teenager spending a little bit of time in the work force. This is also a great opportunity to learn about the value of an individual to the marketplace, and why certain skills or labor translates to an ability to earn more money. Simply put, they will learn that to earn more typically requires high skill, high stress, or both. Among these, a part time job could also provide:
A source of income
The chance to develop interpersonal skills in the workplace
The opportunity to learn new skills
Time management experience
A useful exercise to play with high school aged children would be a life simulation of sorts, to teach them about real world earnings and budgeting. Using just what is advertised in the local newspaper, or localized listings on the internet, have them find an actual job being advertised that requires no higher-education or special skills. A true entry-level full time job. Next up is searching the real estate listings near enough their chosen workplace for an apartment that they would pretend to rent or share with a roommate. A trip to the grocery store with them in charge lets them then see first-hand just how much it can cost to keep oneself alive on a weekly basis. Lastly, have them add to this any utility costs, cell phone costs, transportation or car payments, internet, and other entertainment. This more serious budgeting exercise can be a rather humbling experience, as most teenagers learn that they could not afford even a basic lifestyle that suits their presumed needs. You may afterwards find their grades improving, and a renewed motivation to pursue an interesting skill that is valuable to the marketplace…
Talking about investments with young people is also best kept to reinforcing the fundamentals, and does not necessarily mean attempting to turn them into stock picking experts. Instead, they tend to benefit most from focusing on the valuable concepts. Even with small amounts you could introduce them to basic goal-based planning such as splitting their savings up into specific short, medium, and long term purchases or financial needs. They could learn about long term value investing versus speculative investing, and how each is quite different but each has its time and place. Rules of thumb that stand the test of time like “don’t put all your eggs in one basket” and “don’t invest more than you can afford to lose” are concepts that can be appreciated at any age. As they get older, you could suggest to them any number of popular introductory personal finance books like “Rich Dad Poor Dad” or “The Richest Man in Babylon”; or even invite them to join in for a casual chat at your next meeting with the family’s financial advisor.
– Financial Literacy Around the World: An Overview, Annamaria Lusardi, Journal of Pension Economics and Finance, Volume 10, Issue 4
– Financial Literacy of Young Adults: The Importance of Parental Socialization, National Council on Family Relations, Volume 59, Issue 4
– Financial Literacy Among the Young, Olivia S. Mitchell, The Jounral of Consumer Affairs, Volume 44, Issue 2