Financial literacy: Great lessons for children, and reminders for adults

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 some helpful lessons that could improve your children’s financial independence and ensure they’re prepared for anything life throws their way. They are also useful reminders for us adults as we manage our busy and complex financial lives.

1. How to manage money online securely

Most banking is done digitally, so there’s a good chance that the current generation will primarily manage their finances online and may never set foot in a branch.

Many banks in the EU have child accounts that you can set up 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. It is not just how to use a digital account, but how to do so securely. Introducing the risks from phishing, and various security and scam actors that are out there and the steps to protect against it is as important a first step as having the online account created.

2. What is debt, and when it should be used

Teaching your children how to manage debt can be a great way to prepare them for the future. It may be worth explaining the difference between “good” and “bad” debt. Debt is simply using someone else’s money with the expectation you will pay it back, usually with interest.

Debt can sometimes be good, or at least a necessity, such as taking on a mortgage to buy a house, that you could otherwise not afford to buy outright.

An example of “bad” debt when someone spends outside their means, either their cash flow, or worse, their ability to repay that debt. This can impact a person's credit rating, which in some countries may preclude them from being able to obtain a mortgage.

Credit cards are sometimes used as an example of bad debt, but they can be a useful discussion point about how to use debt productively. In some cases a credit card can extend your purchasing ability and if you have the ability to pay it back in full within the month, you might actually pay no interest- that’s an example of useful debt. If however you only make the minimum interest repayment, you may find that you are accruing interest at very high levels, often between 15% and 20%! Not good at all.

There has been a proliferation of pay day loans and buy now pay later offerings, sometimes in stores. Children may be exposed to these from a young age and teaching your children about the details of these seemingly attractive offerings can save them a lot of cost in the future. They will also often set very high interest rates at eye watering levels.

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?

A quote often attributed to the Greek philosopher Epictetus is that happiness comes not from having more possessions, but from having fewer wants.

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 bad 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.

Compound interest is earning interest on your interest and if you graph it over a sufficient time frame the graph is exponential. Investing regularly and reinvesting the growth you achieve so that also generates more interest and greater returns is how real wealth accumulation can be realised. The earlier you start the greater the potential growth.

5. Financial management is dynamic

One of the complexities of financial planning and investment management is that it does not happen in a static and isolated environment. Its relevant depends on the world around us and needs to adapt and change. There are internal factors -changing jobs, changing cost bases, losing a job, moving countries. These need to be considered when making and reassessing financial plans. There are also external factors – the global economy, stock market ups and downs, recessions, pandemics, conflicts, technological advancements. We can’t control these but they do impact our lives and you need to factor them in and sometimes adjust your financial decision making because of them. Your view of the world also impacts your financial decision making. This can include your attitude to risk and volatility, or to sustainability in investing, and of course, your goals.

The message for children is to set a plan and then to review it frequently to ensure it is still appropriate and relevant.

6. Get good advice

This is a useful life lesson well beyond the realm of finances. It is a reminder that it is smart to acknowledge the boundaries of our areas of expertise and knowledge, and to seek expert advice.

It is stated that cheap advice can end up being very expensive, and the cost cutting DIY approach can have unintended and unwanted consequences.

If you are making important financial planning and investment decisions, invest in a qualified independent financial planner or adviser, like the team at Black Swan Capital.

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 info@blackswancapital.eu.