Financial literacy – The ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turns it into more) and how that person donates it to help others.
As parents, many of us work very hard throughout our lives so our children can be better off financially than we were. On average, education expenses accounts for over 30% of a household’s annual expenditure, so when we send our kids to school, we make sure they study hard and get good grades – that tells us we’re getting good returns on our investments.
Then when the formal education part of life is over, we expect them to either get a good job or start a business venture and start making money. We then expect them to manage that money properly so ideally, we no longer have to supplement them.
We have no doubt heard countless stories of children of affluent parents who squandered their parents’ wealth. We have also heard stories of children of not so affluent parents who created and managed sustainable wealth.
While many factors may affect how a child turns out economically/financially, here’s a question for us parents though – at what point in time did we intentionally teach our children how to manage money?
When they had challenges understanding a subject in school, we either spent time ourselves teaching them that subject, or got a tutor to help their understanding of the subject. However, when it comes to managing finances, we expect them to automatically figure it out without any help/education. It doesn’t always work that way. As with anything else in life, if we want a certain outcome, we must take steps to create the outcome we want. Especially as our educational systems aren’t designed to provide this type of finacial knowledge.
Our children should know what to do with money ideally before they start making their own.
Here are 6 simple things to start discussing with your children:
- What you need versus what you want – Children don’t always have the capacity to differentiate between the two, so they must be taught. ‘Needs’ are things we absolutely must have – food, clothing, shelter – ‘Wants’ are nice to have if there’s sufficient funding available. Help your kids make everyday choices so they understand this principle. A decent, healthy meal as part of a daily balanced diet is a need, junk food is a want. A decent outfit so one looks presentable is a need, an outfit with a designer label is a want.
- Opportunity cost – In simple terms, the cost of doing something in terms of the money that could have been spent doing something else because there isn’t an infinite pool of money. For instance, explain to your child that spending a week’s pocket money on pizza means he/she will not have any spending money for the rest of the week. If you’re going shopping with your child, let your child know what their budget is and everything they get must fall within that budget. They will learn how to trade off and make choices on what they will do with fixed income. The younger they are, the more guidance they may require in making the trade-off e.g. you can’t spend all your money on candy.
- Delayed gratification – Don’t say yes to everything. Children want everything immediately, but as adults we know life doesn’t work that way. So, teach them to wait for what they are asking them for, even if you intend to give it to them. It will help them place a higher value than if everything came quickly.
- Let them know how much things cost in real terms – Children want what they want when they want it. Most do not have a sense of how much things cost, and the effort required to purchase the items. So, help them understand by putting things in simple terms they can understand. Give them a weekly allowance so they know how much they would have left if they bought the items they’re asking for. Encourage them to be entrepreneurial and earn money doing odd jobs for friends/family so they understand the effort required to earn money.
- The power of growth – We shouldn’t only focus on teaching them how to spend but should also look at how to grow money as well. Teach your kids about savings, investments, the power of compounded interest – how their money grows over time.
- The importance of giving – As early as possible children should be taught the importance of giving and taking care of others who may not be as fortunate as they are. If you are giving items away to charity, encourage your child to select what he/she will give as a contribution to making someone else happy – simple things like toys, books, etc.
Over the next few weeks I will share simple, practical exercises we can run with our kids to improve their financial literacy across each of these areas.