Financial literacy is the key to a financially stable life. Unfortunately, it is one of the topics that get less attention in the current education system. As such, it is your responsibility as the parent to ensure your children are financially literate.
You need to teach them the connection between making money, spending and saving, and financial stability. This will make put them on a path of not only being financially stable but also being functional members of the society.
About Financial Literacy
Defined simply, a financially literate person is an individual with sufficient understanding of financial issues to make sound financial decisions. Given a certain amount of money, he or she should be in a position to determine the most important expenses and the expenditure limit.
At the personal level, he or she is able to handle the money they earn to facilitate their lives and, if possible, save and invest.
But all these relate to adults, what is the importance of teaching financial literacy to children?
Managing loans and debts
The single highest cause of financial instability results from poor debt management. The effect of mismanaging your debts affects you personally as well as the people that are around you. Many of the suicides today have been attributed to inability to get out of debts. It has also been connected to many divorces in the developing world.
Ensuring your children are financially literate from a young age teaches them to live within their means. As a result, they can live with minimum or no loans. This keeps their financials and personal life healthy even if they are not earning a lot of money.
Kids are targets of most commercials
Today kids are the main targets of most commercials and marketing gimmicks. You can see this in the bright colored advertisements and wrappings on almost all items. The marketers know that the young mind is vulnerable enough to be convinced by what they see and nag you to buy the items on sale.
By teaching your children about the value of money, they will be able to make sound financial judgments beyond the advertisements they see. You will be cushioning them against the emotional manipulation.
Sound financial decisions
The ability of children to learn how to make sound financial decisions goes beyond overcoming the manipulation by marketers. As they grow, they need to know how to prioritize their expenses. Even among the bills, they need to know which ones they need to pay first and which to pay only if there is some surplus cash.
Steps to ensure your kids are financially literate
Most parents today didn’t receive a lot of financial lessons from their parents or teachers. They therefore do not know how to teach their children about financial stability. Here are a few ideas you can employ:
- Interactive money games
Games like play shop with real money help the child understand the value of money, what it can purchase and the concept of change. You can play the traditional games or use those on the internet.
- Involve the kid in shopping
When you go shopping, involve him or her in comparing things like discounts and whether they make sense. They will also learn how to stick to the shopping list.
- Allowance management
At around the age of 7-9, you can introduce the concept of managing the allowance to your kids. You can open a back account in their name and request for statements. Go through the statements with them and guide on areas that they can improve on.
- Saving for a goal
Saving is probably the hardest feature of managing your personal finances. Teach your children to save with a purpose why letting them save for the toys and other things that they want. You can ask them to save up to a certain amount then you top it up for them.
Why it financial literacy matters
Raising financially knowledgeable children prepares them for the future. Such an adult would start saving for their retirement, their children’s education, housing investments and emergencies early in their lives. He or she would also be better equipped to maintain a healthy credit record so that they can borrow at favorable rates if need be.
On the flip side financially illiterate people are unable to negotiate the complex financial landscape. They do not know how to get adequate information to avoid financial pitfalls. As such, they take unnecessary risks, just right $5000 loans and make uninformed investments.
They therefore end up mismanaging their finances and messing not only their lives but of those that depend on them.
The world is changing very fast and governments are increasingly defunding or underfunding schemes like health funds, social benefits and retirement benefits. As a result, individual citizens are increasingly having to create their own personal funds. This requires that you start to plan your financial funds very early in life.
The need for people to set themselves up for a prosperous future has also increased the urge to make investments. Investing and setting your personal financial status involves a lot of risks. Unfortunately the risks are often packaged as opportunities and it takes a knowledgeable person to discern them.
This is why children need to be taught the topic of finances early in their lives so that by the time they start their independent lives they are well equipped to make smart and responsible decisions. You can’t afford to let them learn through trial and error.