According to the latest OECD PISA report, which surveyed 15-year-olds from 20 countries and economies around the world on financial literacy, one in four students is unable to make simple decisions on everyday spending. Approximately one in two students across OECD countries or economies hold accounts at financial institutions; however, only one in three students can interpret a bank statement. The study also found that students had a stronger performance on the assessment if: Moreover, 94% of students reported they learn about money matters from their parents. Teaching children the basics can help them prepare for practical application in the real world and set them up for success. However, with only 10% of students achieving the highest financial literacy score, there is still work to be done. Financial literacy can start at home with the following everyday topics.
- They have purchased something online (either with a parent or alone)
- They reported being confident with paying with a debit card instead of cash
- They stated they keep track of their balance electronically
- They check if they receive the right change back after making a purchase
- They compare prices between stores when shopping
Teaching by example
The first step in teaching your children about financial literacy is to teach by example. Talk to your kids in an age-appropriate way about how your household runs, how you earn your money and how you pay your bills. Simple exercises can be taught at the grocery store, for example. Teach them that you are on a budget that you need to stick to, so not any item can be added to the grocery cart.
1. Money doesn’t grow on trees
Teaching your kids the value of a dollar is an essential part of their financial education. Many parents choose to teach this lesson with a weekly allowance by requiring their children to complete chores or tasks. This can emulate the concept of hard work resulting in money, which can then be spent on things they want. The hardest part of this lesson may be sticking to the arrangement and standing your ground when your child forgets to complete their chores and, therefore, won’t get paid. But this part of the lesson most closely mimics reality, so make sure to stick to your guns.
2. Saving is important
You can start instilling the importance of saving in your child at a very young age, and the lessons become more complex as they get older. For example, when your child is younger, you can teach them the importance of saving by having them set a portion of their allowance aside for a desired toy. Older children and teenagers can learn the value of saving by putting money away for higher ticket items, like a car or a vacation with friends. You can help motivate this saving by offering to match the cash they can save. Saving for goals like this is an excellent opportunity to highlight the benefits of high-interest savings accounts and compound interest. Show your child how to using these tools will help them reach their savings goals sooner.
3. How to budget
Budgeting is the skill that can make or break your financial future, but startlingly few schools teach even rudimentary lessons on how to manage money. This is where you, the parent, come in. If you have a budget, give your child access to it so they can understand how much money it takes to run your household, and what an average level of spending in on various line items (for example, groceries). By showing your child your budget, you’ll set a positive example for when they start to manage their allowance or part-time job income and later, for living expenses when they move away from home.
4. The difference between wants and needs
Understanding the difference between wants and needs is a fundamental money lesson. Teach your child that a want is something they would like to have, for example, a chocolate bar or movie ticket. A need is something more essential, for example, shelter or utilities. Although most children don’t have to worry about covering the cost of their needs, this knowledge is crucial. Having your child pick out wants and needs from your grocery cart can be a fun activity to instill the habit. A want may be cookies, and a need may be vegetables. Understanding the difference between these two categories will help your child determine what they need to spend money on now and what can wait. When they become more independent, hopefully, they will make mindful decisions as they shop.
5. The consequences of credit
Not fully understanding how credit works has landed many young adults in financial hot water. Starting when they are old enough to receive an allowance, you should start teaching your child about the concept of loans and interest. You could do this by offering your child an “advance” as a portion of their allowance, which they will then have to pay back, with interest. This lesson will teach your child that there is no such thing as “free money,” and all loans must be repaid eventually. Going over the math with your child can show them that using credit can end up costing them more money in the end. However, you should try and give your child as much information as you can. Some parents may approach credit with scare tactics. Although credit can be mishandled, the lesson should focus on using credit responsibly because, as an adult, they will encounter it time and time again. From renting an apartment to getting a mortgage, credit is essential.
6. It’s okay to make mistakes
Finally, making mistakes as a child can be a valuable lesson, with no lasting impact. Instead of impulse buying and racking up debt, they’ll endure a few weeks of repaying a loan on their allowance. Instead of blowing their student loans on food and entertainment, they’ll budget adequately and learn to make it to the end of the month before they make it to the end of their cash supply. These six money lessons may seem tedious to teach and enforce at times. But ultimately, they can lay the foundation for your child to grow up with a solid understanding of money and can help them reach their goals.