Financial literacy plays an important role in the management of money and debt. Its importance is highlighted by creating the Financial Literacy and Education Commission by the US Department of the Treasury (USDT) to sustain the financial well-being of everyone in the country.
While financial literacy programs are designed for adults, children need to become financially literate to prepare themselves for the future. The Consumer Financial Protection Bureau provides tools to help the youth to increase financial literacy. But parents should also do their part to educate their children about financial matters.
Here are the things that parents should do to improve the financial literacy of their children.
Discuss Needs and Wants
Parents should start the financial education of their children by discussing the value of money. To facilitate this, the children should know the difference between needs and wants. So, parents should clarify that needs are necessities, like food, clothing, shelter, education, and healthcare. They should also explain that wants are things they do not need, such as a high-end smartphone or candy.
To illustrate the difference between needs and wants, parents should use the household’s budget as an example. They should also explain to the children that they should prioritize needs over wants regarding household expenses. They should use their money for their needs and only spend for their wants when they have excess funds.
Let Them Earn and Save Money
After discussing needs and wants, parents should also give children the opportunity to earn and save money. This exercise will increase their understanding of the value of money and how challenging it is to earn.
When the pandemic started, children had to stay home to avoid the virus. In this situation, many of them had a lot of free time on their hands, even if they had to attend remote learning sessions. Parents should take advantage of their free time to earn an allowance for doing chores in the house.
While the amount will differ, the point of letting them earn is to encourage them to save and know the value of money. It shows them that it is not easy to earn, allowing them to learn the value of working hard.
Aside from earning, parents should also explain to their children the importance of saving their money. They should also help them set their saving goals to motivate them to save their money. For instance, they can use the money they saved to buy the video game they’ve wanted to get for a long time.
Introduce Stocks and Bonds
Once the children understand the challenge of earning money, parents should introduce children to stocks and bonds, especially if they are old enough to understand the concept. They should explain that stocks allow them to earn from the money they saved.
Parents should explain that stock values can go up and down depending on the profitability and growth of the company they are investing in. They should also explain that stocks offer high returns but also has a high level of risk. On the other hand, bonds are investments that have low risk and low returns.
While the income they receive from investing in bonds will vary, they also offer better stability than investing in a company’s stocks. Parents should also talk about the importance of working with a reputable investment advisor when they think about investing. The professional should have experience and works for the welfare of his client. He should also focus on making decisions that provide a positive outcome for his clients.
Let the Children Invest
When the children are old enough, parents should provide them with a detailed explanation of different investment products. They should also consider helping their children to invest the money they saved on stocks or bonds.
Parents should also explain to the children to avoid putting all their money in the stock or bond market. They should highlight the importance of maintaining a savings account. In this situation, the parents should help the children open a savings or checking account in a bank. This also allows the children to see how their savings will grow over time.
If the children do not have enough funds, the parents can create a model portfolio of the stocks that the children will buy in the future. Creating this model portfolio helps in the learning process and allows the children to increase their understanding of stocks and bonds.
Educating the children about financial matters allows them to become financially literate. It also helps them manage their finances and work on avoiding the accumulation of debt in the future.