“Money makes the world go ‘round,” is a popular quote from the 1970’s musical, Cabaret. It represents a crude yet fundamental, the concept of the importance of financial literacy in society. The quote illustrates that money is so powerful that its influence is akin to the forces of nature that make Earth spin on its axis. America is one of the world’s wealthiest countries. Yet, 37.2 million Americans (11.4%) live in poverty as of 2020, with 11 million of those being children. That is essentially 1 in 10 people who do not make enough income to support themselves.
Compounding the issue, a history of systematic inequalities in society has contributed to disproportionate rates of poverty among black and Latino populations. These poverty rates highlight the importance of financial literacy, starting at an early age. Therefore, it is important to have a foundational grasp of financial literacy and pass that on to the next generation.
Financial literacy is the ability to understand, utilize, and optimize various financial management aspects involving:
- Budgeting- A budget is an estimation of revenue and expenses over a period of time.
- Investing- Investing involves contributing money to a defined undertaking in an attempt to generate positive returns.
- Credit- Credit is the ability to borrow money or access goods/services that you will pay back later, usually with interest.
- Savings- Savings refers to money a person has after they subtract consumer spending from disposable income.
Debt- Debt is money borrowed from a person or finance company that is owed back in return.
Financial literacy involves a foundational relationship with money, utilizing money as a tool that leads to an overall sense of financial well-being, self-trust, and greater life satisfaction. A lack of financial literacy can lead to pitfalls, such as burdens through poor spending decisions and accumulating unsustainable debt. This can lead to poor credit, bankruptcy, housing foreclosure, and/or homelessness.
Due to child labor laws, children are unable to attain jobs like adults. Therefore, children often only observe adults using money to make purchases. Without proper guidance from their adult mentors, children may only get a partial understanding of buying and spending money responsibly. There are ways to help children grasp the concept of money. As a matter of fact, here are 15 ways to help teach your child about financial literacy.
Start talking to your child about money at a young age. Around 40% of parents report they do not talk with their children about money. Many express being embarrassed about discussing the subject. It is suggested that money habits form early in childhood development, often by age seven. By then, most children have formed their thoughts on what money is and how to use it. So, start early by explaining to your child what money is, how it is earned, and how money is used to make purchases. Show your child how you use cash and how it can be represented with a credit/debit card. Explain how different jobs pay different rates based on skill and necessity.
Discuss wants vs. needs. Teach your child the difference between what one simply wants and what is needed to live. Needs typically include food, shelter, clothing, healthcare, and education. Wants often include desires like toys, treats, and luxuries. Practice asking your child about items in the house to see if they perceive the item as a want or a need.
Teach while you shop. Take your child shopping and actively explain the decision-making process when purchasing items. Show your child how much money you have to spend and what your priorities are. Explain why you choose one item over another. Explain the value of discounts and coupons. Letting your child take part in shopping is an excellent opportunity to show you put the household budgeting plan into practice.
Involve your children in major purchases. Include your children in vacation planning or purchasing things for the home. Show them the factors that go into making the decision and have them help you compare the options prior to purchase.
Play games that involve money. Play games that include a financial element like “Monopoly” or “Life” with your child. Help them strategize during the game and discuss why certain choices may be better than others, over time. This will help teach budgeting and planning for the future while you both enjoy playtime. This is play with a purpose.
Give an allowance. Giving children an allowance can help teach the concept of earning money for work through chores. Two-thirds of parents reported giving their child an allowance in 2019. An allowance gives children first-hand experience with their own money. This can help them learn the rewards of careful saving and spending while also teaching the risks of making impulsive purchase-making decisions. There are no strict guidelines on how much allowance to give. Some parents choose to give one dollar for each year of a child’s age. Other parents base their allowance on chores like cleaning, lawn and garden chores, or babysitting younger siblings. Teach your children about salary negotiations and taking on additional tasks. Kids need money of their own to learn how to make decisions about using it.
Give financial obligations. Children can learn how to live within their means. This is a basic component of savings. Some parents put their kids in charge of some of their own expenses, like clothes and video games. Kids appreciate things they can buy with their own money, so this is an opportunity for them to gain more experience in spending and a deeper understanding surrounding the concept of money. Letting the child earn his or her own money helps them understand earning over time.
Set a good example of saving. Saving builds security and independence. A reported 59% of parents have money saved for retirement. Ideally, everyone, but especially parents, should have money saved for retirement. Making regular contributions to a savings/retirement account can set an excellent example for a child. Exemplify a good example by setting up an emergency fund, or savings account or increasing your 401 (k) plan contributions. Explain how saving is a great habit. Saving up for an item or event with your child (like a television for the family room or a family vacation) can show them how to put saving into practice.
Kids will be more successful with their own savings with short-term goals, like a toy they want. Encourage your children to set short-term goals when they are little to help teach delayed gratification. Saving teaches discipline, delayed gratification, goal setting, planning, and preparedness.
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Teach budgeting basics. Being told to save without a reason may seem pointless to a child. Help your child define a savings goal or develop a budget. Let them keep track of cash in a notebook or online for a bank or debit card. Children can track their purchases each day and add them up at the end of the week. This can show their spending patterns.
Offer savings incentives. Retirement plans are a popular incentive because they match contributions. This could be comparably effective for your child. Offer an incentive, like a percentage match on savings or a reward for reaching a savings goal.
Act as their creditor. Consider lending your child money that requires payment with interest. The goal is to teach delayed gratification and have them understand that credit comes with paying interest. This allows them a tangible example of how they have to pay back MORE than what they actually borrow.
Make a wishlist. Create a set of priorities. Explain how, while we cannot get everything we want at once, we can achieve goals over time by planning ahead. Have your child list what they want and rank them from most to least important. Strategize about how they can eventually obtain all of their wishes with proper planning.
Show children the value of giving. You can share your money values with your children. Explain charitable causes. If they observe you making generous donations, they are likely to follow suit. Split money into categories like spending, savings, and giving. Explain each category and how they use the money in each section. When they reach a certain “giving goal,” donate it to the charity of their choice.
Teach children how their money can grow. Consider letting your child leave their allowance with you over time to gain interest. Let them see how interest can operate in their favor.
No one is perfect, especially when it comes to finances. But it is important to model good financial behavior for your children. Just like you would do for yourself, leave room for mistakes. Allow your child to ask financial questions – even ones that may seem too personal. Money should not be a sensitive subject, especially among loved ones.