There are several benefits of teaching kids financial literacy, including making smart, informed financial decisions. By giving your children an early start in understanding finances and money management, you can be sure they will grow into adults who can be responsible with their money and depend on themselves for financial support.
A child’s financial education is almost always best undertaken by a parent or guardian, as it is a valuable lesson that can be passed on. Financial literacy for children is an essential life skill parents should impart on their children before they grow up. Not just financial basics, but also the understanding of how to manage money and save wisely for the future.
Students who are required to take personal finance courses starting from a young age are more likely to tap lower-cost loans and grants when it comes to paying for college and less likely to rely on private loans or high-interest credit cards, according to a study by Christiana Stoddard and Carly Urban for the National Endowment for Financial Education. (Students are also even more likely to enroll in college when they are aware of the financial resources available to help them pay for it.)
Financial literacy comes from parents and elders who equip them with the right information so they learn how to manage their money wisely. They need all the help they can get. Check out these 7 basic principles of financial literacy that you can teach to your kids and use them as a guide for making smart financial decisions for your child.
1. The difference between wants and needs. Good financial decisions start by being able to distinguish between what is necessary to have and what is nice to have.
2. Every purchase has an opportunity cost. Children also need to know money is finite, even for wealthy families. That means money used to purchase one item won’t be available to purchase other items.
3. The repercussions of making a money mistake. Parents may be inclined to shield their children from making poor money decisions.
4. How to delay gratification. One of the foundational financial lessons every child should learn is how to wait to make a purchase. Practicing delayed gratification creates the self-discipline needed to save money for retirement, college, and other expenses in adulthood.
5. How credit works. Most of the lessons children need to learn to become financially literate relate to values and behavior, not the technical aspects of how money works. One exception is credit.
6. Time helps money grow. Parents should also stress that money has a time value. In other words, thanks to compounding interest, money saved or invested over a long period has the potential to grow significantly.
7. How money works in the real world. Children often lack perspective when it comes to money. Kids might think $1,000 is all the money in the world. Parents need to teach their children a more realistic vision of how much money is needed to run a household.
Financial literacy is a universal skill that all kids need to execute so they can reap the benefits of globalization, better living conditions, freedom, human development, and prosperity. It will teach responsibility.