From Piggy Banks to Investments: The Importance of Financial Literacy for Kids

July 9, 2024

0 5 minutes read

Introduction

In today’s complex financial world, equipping children with the skills and knowledge to make informed and responsible financial decisions is crucial. Financial literacy goes beyond basic math skills; it encompasses understanding financial concepts such as interest, inflation, and risk, as well as financial tools like bank accounts, credit cards, and loans. By instilling financial literacy in children, we empower them to take control of their financial futures, avoid common financial pitfalls, and achieve financial stability.

What is Financial Literacy?

Financial literacy is the ability to make financially responsible, informed decisions in everyday life. It includes saving, investing, spending, earning, and borrowing. Financially literate individuals understand key concepts such as interest, inflation, and risk, and are familiar with financial tools like bank accounts, credit cards, and loans. Equipping children with this range of financial knowledge and skills will empower them to take control of their financial futures, make wise financial decisions, and avoid common financial pitfalls.

The Importance of Financial Literacy

Managing money effectively demands a sophisticated set of skills ranging from basic mathematical abilities to budgeting and understanding how interest works. It also requires emotional regulation to avoid splurging. According to analysis by CBI Economics commissioned by GoHenry and Wilson Wright, financial literacy can raise early-career earnings prospects by up to 28%. Furthermore, a Cambridge University study found that financial habits are formed by the age of seven, highlighting the importance of starting financial education early.

Why Should Financial Literacy Be Taught in Schools?

We live in an increasingly complicated financial world, and this is why children need a strong financial education. Teaching financial education benefits all children and young people by giving them the skills they need to plan for the future, remain solvent, and avoid getting into problem debt later in life. Stewart Perry, Director of the Centre for Financial Capability, emphasizes the importance of delivering financial education through schools to boost children’s money confidence and financial resilience.

Despite being part of the secondary school National Curriculum since 2014, there is still a significant financial literacy gap to fill. Many schools and colleges would like to increase their financial education offerings, but a busy timetable and a lack of skills and knowledge often hinder them.

Talking to Your Kids About Financial Literacy

Talking to your kids about financial literacy doesn’t have to be a deep and complicated conversation. The best way to do it is to make talking about finances an everyday conversation with room to put what you say into practice. Research from the CFPB (Consumer Financial Protection Bureau) has shown that kids start to develop values, skills, and attitudes surrounding money and financial habits in early childhood. Providing kids with an income, such as pocket money, gives them the opportunity to practice these critical skills.

As a starting point, talk about money and where it comes from when you buy groceries, pay bills in restaurants, and get cash from the ATM. For teenagers, expand their financial understanding with conversations about borrowing, credit scores, loans, and the stock market.

The Benefits of Being Financially Literate from a Young Age

Our recent economic research has shown the difference teaching kids to be financially literate can make, with kids who received financial education from an early age being £70,000 richer in retirement. Financial literacy provides the opportunity for more young people to have a bright and prosperous future. It also brings a range of individual, societal, and workplace benefits, empowering young people with the right tools and knowledge.

Helping kids develop skills to manage money effectively, including budgeting, saving, investing, and avoiding debt, has numerous benefits:

Financial Independence: Kids learn to become more self-reliant and less dependent on others for financial support.
Improved Decision-Making: Financial literacy enables informed decisions about spending, saving, investing, and borrowing, leading to better financial outcomes.
Debt Management: Financially literate individuals are better equipped to manage and avoid debt by understanding interest rates, loan terms, and credit scores.
Building Wealth: Smart investment choices and saving strategies can build wealth over time.
Financial Security: Being financially literate provides a sense of security and peace of mind.
Avoiding Financial Pitfalls: Financially literate individuals are less likely to fall victim to scams or predatory lending practices.
Teaching Responsibility and Accountability: Good money management habits instilled from a young age last a lifetime.
Empowerment: Ultimately, financial literacy empowers individuals to take control of their financial futures, pursue their dreams, and live life on their own terms.

Key Components of Financial Literacy

At GoHenry, we believe there are six key components of financial literacy: earn, spend, save, invest, borrow, and protect.

Spend

Under the umbrella of spending comes a whole host of money skills that kids need to understand to become financially literate. These include teaching kids the value of money, showing them where money comes from, and using GoHenry’s Money Missions to show them how to budget. It’s also important to explain the difference between needs and wants.

Save

Saving isn’t just about putting money away in a jar; it’s about knowing why you’re doing it and setting both short-term and long-term financial goals. Showing kids the importance of saving for financial stability and delaying gratification is crucial.

Earn

Earning money gives children hands-on experience with financial transactions, helping them understand the value of money. It’s also important for kids to understand how to read payslips, know what taxes are, and why we pay them.

Borrow

Understanding borrowing, interest, loans, repayments, and maintaining a healthy credit score is crucial for ensuring that children don’t create large debt loads as adults. Teaching kids about credit and how to build a good credit history is essential.

Invest

Kids need to understand that investing can be an effective way to build wealth. Teaching them about tax-free and long-term investments, as well as the stock market, is vital.

Protect

A key part of financial literacy is teaching kids about online scams and the best money safety tips for protecting their money. This includes keeping personal details safe, creating strong passwords, and understanding digital security methods.

Activities to Help Children Build Financial Literacy

It’s never too early to start building financial literacy through practical activities:

Give Them Pocket Money: Regular pocket money helps accelerate financial education and teaches kids to be financially responsible.
Use a Financial Education App: Apps like GoHenry’s Money Missions provide interactive ways to learn about money.
Start Budgeting: Teach kids how to budget their pocket money, setting them up for better money management in adulthood.
Set Savings Goals: Help kids set up different saving pots for short-, mid-, and long-term goals.
Participate in the Digital Economy: Encourage kids to understand digital spending and saving.
Get a Summer Job: A summer job provides new financial experiences, from dealing with tax to understanding the value of time.
Get Paid for Chores: Doing chores for extra money teaches kids how money is earned and saved.
Show Them Common Financial Mistakes: Teaching kids about common financial mistakes, such as spending more than they earn and not saving for the future, is crucial for developing good money management skills.

Financial Literacy Resources

Utilize a variety of resources to teach your kids about money. From board games to age-appropriate explanations and fun videos, good resources can instill the right money messages in a way that sticks.

Conclusion

Financial literacy is an essential skill that empowers children to take control of their financial futures. By teaching kids the key components of financial literacy—earn, spend, save, invest, borrow, and protect—we equip them with the tools they need to make informed decisions and achieve financial stability. Starting financial education early, incorporating practical activities, and utilizing available resources can make a significant difference in a child’s financial well-being. With the right knowledge and skills, children can grow up to be financially confident and capable adults.

Source of image: https://blog.usalliance.org/

July 9, 2024

0 5 minutes read