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Importance of Financial Literacy in Children

In today’s article, we’ll be discussing the importance of financial literacy in children.

Success in life hinges upon early initiation.

In both professional and personal realms, the adage “the early bird catches the worm” resonates, positioning you at the forefront of the race.

This philosophy extends to why you might enroll your children in enrichment classes and coaching institutions.

While nurturing your child’s skills, be it in sports or academics, is undeniably essential, the significance of financial literacy often remains underestimated.

Irrespective of their future professions, children will navigate the complexities of money throughout their lives.

According to financial experts and studies, by the tender age of seven, most children typically grasp the fundamental workings of money.

In Singapore, this marks the period when children often begin handling their daily allowance as they embark on their primary school journey.

This phase is also instrumental in shaping their attitudes towards money.

Therefore, instilling the value of money in your children should commence as soon as they can count.

Here, we present straightforward ways through which parents can empower their children to initiate a lifelong habit of saving.

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).

Teaching Kids About Money: Important Considerations

Earning

Commence your journey into money parenting by introducing the concept of earning to your child.

Even as early as two to three years old, children can embark on this educational journey.

Encourage them to earn through simple tasks like tidying up their room or making their bed.

Such rewards, even if they seem modest, instill the foundational habit of earning in your child.

Savings

As your child acquaints themselves with earning money, they begin to comprehend the varying values associated with different aspects of life.

Some endeavors require more funds than others, and this insight ushers in the importance of saving.

This is an opportune time to introduce the iconic piggy bank where your children can begin to stash their hard-earned coins.

For older children, consider opening a bank account, which not only aids in saving but also provides an avenue for multiplying their funds.

With a joint account, you can monitor the growth of their money and track their expenditure.

Spending

Your child’s initial financial decisions revolve around how they choose to spend their money.

Children who have earned their money tend to be more conscientious about their expenditure in comparison to those who receive handouts.

This experience imparts the value of hard work and allows your child to make decisions, sometimes unconventional or perceived as unwise, while also learning from their choices.

Teaching Kids About Money
Photo: Canva

Needs vs Wants

Instill in your child the crucial distinction between needs and wants before they make a purchase.

As a parent, educate them about the disparities between essential requirements and discretionary desires.

Encourage them to trust their instincts and make decisions — whether deemed prudent or unwise.

By rendering them financially responsible, you empower your child to understand the repercussions of their actions.

A functional laptop is crucial, whether for online or in-person schooling and completing assignments.

Food is an undeniable basic necessity; even when budgeting, skipping meals is not advisable.

Essential medications should be purchased without hesitation when you’re unwell to ensure your health and well-being.

Opting for a brand-new laptop loaded with features you may rarely use can be categorized as a want rather than a need.

Depending on the items you purchase and your expenditure, even food can sometimes fall into the category of wants.

Regularly buying an expensive Starbucks coffee, for instance, may not be essential.

Cosmetic products often lean more towards wants, particularly if you already possess similar items or use them infrequently.

Your personal need for a vehicle can also fluctuate based on your location and access to public transportation.

While clothing is generally a necessity, exclusively buying high-end brand-name items can transform it into a want.

Frequently, peer influence can prompt you to believe you need certain possessions to fit in.

However, it’s essential to weigh your choices thoughtfully.

Spending is an integral part of life, but it’s essential to remain vigilant to prevent overspending or accumulating debt.

Employ these key methods to maintain control over your finances:

  • Gain an in-depth understanding of your kid’s expenses by listing all their expenditures.
  • Prioritize their needs, which are the things they can’t do without.
  • Align their spending with core values, reflecting on whether the benefits outweigh the costs.
  • For instance, if your kid’s health is paramount and you opt for organic foods, the additional cost may be justified by the advantages.
  • Explore alternatives to perceived needs that might, upon closer inspection, be wants.
  • If, for instance, your kid wishes to shed some weight but is averse to paying for a gym membership, consider home workouts or running as effective substitutes.

Practice compromise to reduce spending on wants. While you can’t eliminate such expenses, you can curtail them.

For example, if your kid likes dining out with friends, consider doing it once a month instead of every weekend, thereby allowing enjoyment while safeguarding finances.

Using Electronic Money

Electronic money possesses the advantage of traceability, permitting both you and your child to monitor their expenditures.

Instead of utilizing cash, transfer your child’s allowance into their bank account and encourage them to opt for electronic transactions.

This not only maintains a digital record but also prompts your child to reflect on their spending choices.

This opportunity offers insights into identifying unnecessary purchases and underscores the potential for savings.

Credit

Financial literacy transcends earning and saving; it encompasses comprehending credit usage and its subsequent repayment.

As your child matures, exposure to various forms of credit such as education loans, home loans, or personal loans is an integral part of adulthood.

Initiating this understanding early on through offering them credit with the stipulation that they repay it within a predetermined time-frame, can be an enlightening experience.

Debt

In the current era, Generation Z maintains the lowest average credit card debt compared to other generations.

This positive trend is partly attributed to the observation of parents grappling with debt during economic downturns.

In the contemporary landscape, electronic money may obfuscate the tangibility of funds, underscoring the importance of teaching your child about debt and its potential consequences.

Encourage open discussions, share personal stories, and emphasize the significance of responsible money management.

Budgeting

To prevent debt entanglements, commence by instilling the art of budgeting.

Encourage your child to maintain records of their monthly expenditures and plan accordingly for the following month.

For older children, transitioning to Excel spreadsheets or specialized budgeting apps can further refine their financial discipline.

Banking

Commencing early with banking education is invaluable.

As teens approach their early and mid-teens, foster independence by allowing them to conduct deposits and withdrawals at the bank.

Inclusive guidance on completing forms, understanding the process, and explaining the principles of interest can demystify the world of banking, enabling them to efficiently manage their funds.

Related content: How The Japanese Budgeting System Kakeibo Can Assist You In Maximizing Your Savings This 2022

Investing for Kids

Your child is more astute and adaptable than you may presume.

Rather than initiating your child into financial literacy at a later stage, guide them from an early age.

Explore various investment avenues, from elementary options like fixed deposits and recurring deposits to more advanced investments such as stocks, bonds, and even cryptocurrencies.

Learning about potential risks and encouraging self-initiated research will shape them into informed investors.

Set Limits

Establish financial boundaries that allow for correctable mistakes, assuring that your child’s financial errors are not insurmountable.

These boundaries may specify the amount your child can invest without jeopardizing their savings or other financial commitments.

Thus, they will be able to build confidence in making realistic financial decisions.

Failure

Parents are guiding lights in their children’s financial literacy journey.

They must also allow their offspring to experience and comprehend the consequences of misguided decisions.

This necessitates permitting children to fail from time to time, affording them the invaluable opportunity to learn and adapt.

Whether it be excessive spending on entertainment or food, resulting in budgetary constraints for the remainder of the week, these experiences impart essential life lessons.

parents guiding children about the importance of financial literacy
Photo: Canva

Personal Finance

Not every household maintains perfect financial harmony. Economic challenges may occasionally arise.

It is vital to communicate such challenges to your children.

While it is not about burdening your child with knowledge of familial debts, it is an opportunity to teach them to avoid making the same financial missteps.

Encourage open conversations about financial difficulties and the importance of prudent financial decisions.

Taxation

The significance of understanding taxes and the process of filing tax returns is often overlooked during childhood.

Yet, it is an essential aspect of financial literacy.

Encourage your children to participate in the process of filing taxes, providing them with a basic understanding of its importance.

Collaborate with schools to incorporate tax education into the curriculum, especially for students in higher classes.

Creating an Emergency Fund

Instill the habit of maintaining an untouched emergency fund — a secondary bank account or a home-based piggy bank solely dedicated to deposits.

Encourage your child to visualize the purpose of this fund, highlighting how it safeguards them during unforeseen financial crises.

This practice enhances their ability to manage their finances and secure their future.

Developing Financial Goals

A debt-free future hinges on making sound investments at the right time, and this necessitates a strong financial foundation.

Teach your children to identify potential investments, particularly critical for older teens planning to study abroad or embark on costly educational endeavors.

Rather than opting for education loans, investments, guided by your expertise, can assist them in financing their tuition fees.

Encourage them to maintain focus on the larger picture and save according to their predefined goals.

Encourage Part-Time Jobs

Older children can engage in part-time employment, contributing to their income and learning valuable life skills.

Encourage them to explore skills or interests that could potentially evolve into future careers.

Regardless of the outcome, part-time jobs and side gigs foster entrepreneurial acumen, financial management, and the balance between school and work responsibilities.

The 50/30/20 Rule

As your child’s income grows, introduce them to the golden 50/30/20 rule.

This principle advocates dedicating 50% of income to needs, 30% to wants, and 20% to savings.

The simplicity of this concept renders it accessible even to seven-year-olds, contributing to the development of their financial decision-making abilities.

Setting an Example

To ignite your child’s passion for financial literacy, create an environment conducive to learning at home.

Share your savings goals, shedding light on what you are saving for.

Consider initiating a joint savings account for a tangible goal, such as a new television or household appliance, where your child can make a substantial and concrete contribution.

Financial Literacy for Beginners

Regardless of your child’s age, it is never too late to initiate financial literacy.

There is no ‘perfect’ age to begin this educational journey, and it is never too early or too late to learn about managing finances.

Every step you take in this direction positions you at an advantage, paving the way for a more financially informed future.

Related content: Personal Financial Planning: The Ultimate Guide

Tips for Teens

financial literacy for teens
Photo: Canva

Budgeting for Teens

Budgeting is a smart way to handle your money and make sure you don’t spend more than you earn.

It helps you plan for short-term and long-term expenses. Ideally, you’ll end up with savings, but at the very least, it will help you avoid getting into debt.

Getting Started with Budgeting:

  • Keep track of your income, whether it’s an allowance or part-time job earnings.
  • List your expenses in detail, even the small ones, because they add up.
  • Categorize your expenses, such as food, entertainment, or health.
  • Keep your budget up-to-date by recording your daily spending.

Related content: Singapore’s 8 Most Important Budgeting Guidelines For Young Folks

Saving Tips for Teens

Having savings offers you financial independence and helps cover unexpected expenses without relying on your parents.

If you place your savings in an account, it can grow over time, thanks to compound interest.

  • Follow the formula: Income – Expenses = Savings.
  • Cut back on deliveries and online shopping to save more.
  • Avoid relying on credit cards; try to pay your balance in full each month.
  • Regularly save a portion of your income in a savings account.

Tips for Teen Taxation

If you have a summer or part-time job, you’ll earn your own money but don’t forget about taxes.

A portion of your earnings will be deducted as taxes by your employer, which is why your take-home pay is less than expected.

  • Differentiate between gross income (before taxes) and net income (after taxes).
  • Understand income tax brackets based on your earnings.
  • Determine if your income is tax-exempt, often in the form of gifts.

Preventing Debt as a Teen

While your expenses shouldn’t surpass your income, sometimes you’ll need to borrow money.

Not all debt is bad; it can help you improve your quality of life.

However, mismanaged debt can have negative effects, impacting your mental health and credit score.

  • Differentiate between good and bad debt; good debt is worth the interest you pay, on student loans.
  • Use a debit card instead of a credit card to avoid incurring debt.
  • If you have a credit card, use it wisely and pay your statements on time.
  • Maintain a good credit score, which is crucial for future financial endeavors.

Investing for Teens

Investing involves putting money into something you expect will yield a profit in the future.

Starting to invest as a teen can be advantageous because time is on your side for long-term growth.

  • Explore different types of investments, such as stocks, mutual funds, and bonds.
  • Try a micro-investing app to learn about investments with less risk.
  • Consider consulting a financial advisor for guidance on building and balancing your investment portfolio.

Financial Protection

Protecting your finances and personal information is crucial.

This involves reviewing your financial statements and safeguarding against identity theft, scams, and fraudulent activities.

Protecting Yourself from Identity Theft:

  • Regularly review your credit card statements to detect any unauthorized activities.
  • Safeguard personal information and shred documents containing sensitive data.
  • Install antivirus software on your devices to protect against malware.
  • Use strong and unique passwords for your accounts.

These are essential aspects of managing your money wisely as a teenager, setting a foundation for a financially secure future.

Tips for Teens with Jobs

As you grow older and take on more responsibilities, your financial situation will change.

Instead of relying on allowances, you’ll earn a salary.

Facing these new financial challenges, you can take practical steps to manage your finances effectively.

Salary Management

Getting a job is an exciting step, whether it’s full-time or part-time.

It opens up various financial opportunities, like building credit and investing.

Here’s how you can start managing your first salary:

  • Determine your savings amount (5% to 20%) and choose a high-yield savings account.
  • Create a budget that tracks your monthly finances, including debts, income, savings, and discretionary spending.
  • Identify and cut discretionary expenses to avoid overspending.
  • Project additional expenses and adjust your spending to accommodate them.
  • Negotiate for a higher salary as your experience grows, providing more financial flexibility.

Building Credit

Establishing good credit is essential for future financial endeavors.

While it may be challenging for teens without a credit history, you can take steps to build credit:

  • Maintain a consistent employment history, which credit issuers may consider.
  • Become an authorized user of your parent’s credit card to practice responsible credit card use.
  • Get a cosigner for a credit card to help build credit by making timely payments.
  • Consider a secured credit card to start from scratch, creating a positive credit history.
  • Explore student credit cards with lenient qualification requirements.

Finding the Right Insurance

Insurance is crucial for protecting your assets and finances.

Determine your insurance needs based on your circumstances, like auto insurance if you’re not covered by your parents.

Calculate the coverage amount and assess if additional coverage are necessary.

To find the best deal, compare quotes from multiple insurers.

Retirement Planning

Though it may seem early, saving for retirement as a teen offers significant advantages due to the longer time for your money to grow.

Understand your retirement savings options and decide which option to prioritize.

Try considering factors like employer matching contributions and your available resources.

Start planning for retirement now to secure your financial future.

Related content: Happy Retirement: The Retirement Plan Guide for Expats

Importance of Financial Literacy in Children Bottom Line

Initiating financial literacy from an early age empowers children to navigate life’s financial complexities with confidence.

By incorporating these simple yet impactful strategies, parents play a pivotal role in shaping their children into financially responsible individuals.

You will also be providing them with the tools to secure their financial future.

Financial literacy is an invaluable gift that lasts a lifetime, equipping children with the skills needed to make informed decisions and build a stable financial foundation.

That being said, I strongly hope that the information in this article was helpful for you.

If you are on the lookout for an expert financial advisor and/or wealth manager, you are in the right place.

I tend to offer tailored financial solutions that are efficient in addressing the investment needs of expats and high-net-worth individuals.

Feel free to contact me to find out whether you can benefit from my services.

Pained by financial indecision? Want to invest with Adam?

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Adam is an internationally recognised author on financial matters, with over 735.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

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