Financial literacy, knowing how to manage your money, is not something that is intuitive, and it is often not taught formally. Providing this information to your children can help them, and you. Here are five helpful lessons that could improve your children’s financial independence and ensure they’re prepared for anything life throws their way.
1. How to manage their money online
These days, most banking is done digitally, so there’s a good chance that the current generation will primarily manage their finances online.
You could set up an online account for them to use and manage. This will provide a good introduction for them to grasp the concept of digital money and how to look after it themselves.
2. What is debt, and when it should be used
As you may know, it’s easy to feel snowed under when debt starts piling up. So, teaching your children how to manage debt could be a great way to prepare them for the future.
It may be worth explaining the difference between “good” and “bad” debt. For instance, you should teach them that debt isn’t always bad, such as if they need a mortgage to buy a house that is likely to appreciate in value.
Meanwhile, you can teach them that “bad” debt is when they spend outside their means, perhaps on non-essential items.
This could also be the perfect time to warn your children about credit card debt and “buy now, pay later” schemes. You can explain that these forms of debt often have prohibitive interest rates and that credit card debt that they don’t pay off quickly can soon spiral.
To help your child distinguish between good and bad debt, you could teach them the difference between “wants” and “needs”. Encourage them to ask themselves: is it really worth getting in debt for this purchase?
3. The importance of saving early
Getting a child into healthy saving habits early can instil good behaviours for later life.
An easy way to start is to open a savings account for your child to keep their pocket money in. This could encourage them to save for things that appear expensive in relation to the money they receive each week or month, but affordable if they save over the long term. It also introduces the concept of deferred gratification, of waiting, and saving up for something they consider to be important to them. This fits in with the point above about avoiding debt.
This could also lead to helpful conversations about what to do with additional sums of money they receive – such as for birthdays or Christmas. Teaching your children the importance of early saving could help them develop healthy saving habits as they age.
4. The power of compounding interest and returns
It may be apocryphal that Einstein once reportedly described compounding returns as the “eighth wonder of the world”, but it is a great statement! It’s worth teaching your children about the power of compounding returns and the effect on long-term savings.
Granted, this can often be a tricky subject for younger children to get their heads around, so it may be worth teaching them in the form of a game. One such activity is the “bank of treats” game. Simply give your child a small amount of money, and tell them to put them in their “bank”.
After a short while of saving, you can add more cash to their “bank” to show them how delayed gratification could earn them more in the long run. When your child understands just how powerful compounding returns can be, they may be more eager to save.
While teaching your children about compounding returns, it may also be worth mentioning how high interest rates can quickly escalate debt levels on unsecured borrowing, such as credit cards.
5. The idea of “earning to spend”
In many cases, to spend money, you first need to earn it. This is an unavoidable fact of life, so reinforcing this with your children as early as possible could be a great way to develop their financial literacy.
You could get your child to help around the house with chores to earn some, or all, of their pocket money. By doing so, they could come to appreciate the value of money and hard work.
Then, when your child is old enough, you could encourage them to get a part-time job to increase the amount of money they save.
These principles, while valuable as learning tools for children are also useful reminders for adults. If you would like more information or assistance in managing your financial situation, please contact us at [email protected].