The Organisation for Economic Co-operation and Development (OECD) released a study in 2017 and found that one in five students lack basic financial knowledge. This would mean poorer financial choices into adulthood, such as:
- Spending more than they earn
- Using credit to finance liabilities
- Occasionally overdrawing their bank account
To mitigate and eliminate financial illiteracy, one has to learn about and practise smart financial choices. In essence, we need to teach our kids financial literacy now. By doing so, we are equipping our children to fight the urge of spending on impulse in general. To do this effectively, starting young gives a breathing space for our kids to make mistakes and build healthy financial habits.
What Is Financial Literacy?
Before we delve into detail, what exactly is financial literacy?
According to best-selling author, Robert Kiyosaki, it means having the ability to make smart financial decisions and repeating them.
So, what exactly are smart decisions? And how does one even begin to make them?
This article outlines simple and effective ways to educate about and increase financial awareness in young children.
1. Differentiating Between Needs and Wants
Drawing a clear, defined line between needs and wants goes a long way when it comes to achieving financial literacy. You can teach this rather arbitrary yet complicated concept through role-playing.
For example, telling your child that spending money on toys means that you wouldn’t have enough money to eat dinner. You can even respond to your child’s expensive request by illustrating its effect, “If we buy the iPad that you want, you will need to sleep without turning on the air conditioner for the next two months. Are you okay with that?”
Practical scenarios like these make it easier for your child to understand the meaning of opportunity costs and how one decision affects the outcome.
2. Learning Opportunity Costs
Your child will pick up a pattern when you repeatedly use the same examples and will equate these examples to excuses to put off their wants. Handle this situation by giving them a sense of perspective of an outcome.
During grocery shopping, for example, your child’s senses are bombarded with junk food’s and snacks’ flashy labels. Incorporate the use of money by showing your child the price differences between famous and non-famous brands.
Doing this helps your child learn the concept of quality over quantity and vice versa. They learn how trade-offs work, that there are limited resources in this world, and we ought to be smart with our management with them.
3. Delaying Instant Gratification
Back to our grocery example, this applies to pocket money as well. We can teach children financial decisions by promoting delayed gratification.
Before your child even begins spending, you could prompt them that by saving they can buy something more expensive. The lesson taught us not to value luxuries but to appreciate and practise the state of more options. Often, the choices of today would have irreversible consequences for tomorrow.
What this teaches your child is that if one can overcome their emotions of desire, then one is rewarded with more choices. Similar to buying a car, if one is able to delay his purchase, no interest is charged on the loan.
4. The Old School Finance: Budgeting
Budgeting is the most fundamental step to managing one’s finance. But the real challenge is teaching your child just that. Assuming that you provide your child with pocket money, try to give them monthly instead of weekly or daily. This is an effective approach as it mimics a monthly salary.
Your child may be tempted to spend without a care in the world considering that monthly pocket money is given in lump sum, giving off the false idea that the sum is a lot more than weekly or daily pocket money. This is where you let go.
Once they hit the crossroad, they will start asking for more. Take this opportunity to teach them budgeting. Follow the 50/30/20 rule:
50% of income goes to needs such as food
20% of income goes to wants such as games, outing and clothing
30% of income goes to saving or forms of investment
Parents know this; nagging is not the most effective method as children can’t quite understand the reason for any lessons. So, allowing your child to make mistakes in a controlled environment is a great way to teach budgeting.
Often, children don’t respond well to nagging because they can’t quite understand the reason for a certain lesson. Therefore, allowing them to make mistakes in a controlled environment is a great way to teach.
The answer to teaching children about money and financial literacy is in when they start to learn it – as early as possible. Starting young helps to form a healthy habit which allows them to have room for error and fewer responsibilities.
Personal Finances is not a topic that will end over a dinner conversation, but a small and continuous process of learning. If ever you are out of ideas, model your exemplary behaviour! Your child is most likely to mimic in later parts of their life.
OECD. (2017). PISA 2015 results (Volume IV): students’ financial literacy. Paris: PISA, OECD Publishing. https://doi.org/10.1787/9789264270282-en.
Lusardi, A. Financial literacy and the need for financial education: evidence and implications. Swiss J Economics Statistics 155, 1 (2019). https://doi.org/10.1186/s41937-019-0027-5