What is financial literacy?
Financial literacy is the ability to make financially responsible, informed decisions in everyday life. It covers everything from saving and investing to spending, earning, and borrowing. Being financially literate also means understanding financial concepts such as interest, inflation, and risk, and financial tools such as bank accounts, credit cards, and loans. Equipping your child with this range of financial knowledge, skillset, and behaviours will help to empower them to take control of their financial futures, make wise financial decisions, and avoid common financial pitfalls to achieve financial stability.
The importance of financial literacy
“Managing money effectively demands a sophisticated set of skills ranging from basic mathematical skills to budgeting, an understanding of how interest works, and emotional regulation to avoid splurging. CBI Economics analysis commissioned by GoHenry and Wilson Wright underlines that financial literacy raises early-career earnings prospects by up to 28% and that students with high financial literacy are more likely to start a business.”
Louise Hill, Co-founder and CEO of GoHenry
According to a Cambridge University study, financial habits are formed by the age of seven, with most young people forming the core behaviours that will affect the financial decisions they make throughout their lives.
Sam Sims, Chief Executive of National Numeracy, agrees: "Feeling confident with numbers is a vital life skill, particularly when it comes to managing your money. We're faced with daily decisions about money every day at work and home, from paying household bills to comparing prices in a supermarket or saving for a holiday. If we don’t feel confident with numbers, it's harder to stay in control of our finances."
Although financial literacy has been part of the secondary school National Curriculum since 2014, there is still a big financial literacy gap to fill. A study from the London Institute of Banking and Finance found that 82% of young people want to learn more about money and finance, saying they want to learn more about financial products – such as mortgages, pensions, loans and credit cards – along with budgeting and debt management, followed closely by tax.
Related: The importance of financial literacy for Gen Z
Why should financial literacy be taught in schools?
We live in an increasingly complicated financial world, and this is why children need a strong financial education. Teaching financial education benefits all children and young people by giving them the skills they need to plan for the future, remain solvent, and avoid getting into problem debt later in life.
“In order to combat the national financial capability crisis, it is vital that children and young people are given the opportunity to develop financial and money management skills through robust financial education. Delivering financial education through schools is an important way to boost children’s money confidence and financial resilience, which can help them in the future when facing economic difficulties. ”
Stewart Perry, Director of the Centre for Financial Capability
Children and young people who say they had financial education at school are more likely to have good money skills. Yet, only 4 in 10 children and young people say they’ve had some financial education at school. Many schools and colleges would like to increase their financial education offer, but a busy timetable and curriculum and a lack of skills and knowledge hinder them.
Related: Why isn't financial literacy taught in schools?, Things we wish kids could learn at school
Talking to your kids about financial literacy
Talking to your kids about financial literacy doesn’t have to be a deep and complicated conversation. The best way to do it is to make talking about finances an everyday conversation with room to put what you say into practice.
“Research from the CFPB (Consumer Financial Protection Bureau) has shown us that kids start to develop the values, skills, and attitudes surrounding money and financial habits in early childhood,” says Louise Hill, co-founder and CEO of GoHenry. “They also begin to develop skills like planning ahead and understanding the concept of delayed gratification. So if you then provide kids with an income – in the form of pocket money/allowance – you give them the opportunity to have real-life practice with all of these critical skills which form the building blocks of their adult financial capability.”
As a starting point, talk about money and where it comes from when you buy groceries, pay bills in restaurants and get cash from the ATM. Conversations like these will help kids start building a picture of what financial literacy means in real terms.
Related: Teaching kids about money
With teenagers work on expanding their financial understanding with conversations around the more complicated parts of the financial world. Discuss borrowing, credit scores, loans, and the stock market. Link these chats to what you see on the news, what they are learning about in school, and their career plans and life goals.
Related: Teen money management
What are the benefits of being financially literate from a young age?
Our recent economic research has shown the difference teaching kids to be financially literate can make, with kids who received financial education from an early age being £70,000 richer in retirement.
“Financial literacy provides the opportunity for more young people to have a bright and prosperous future,” says Louise Hill. “It also brings a range of individual, societal and workplace benefits – we just need to empower young people with the right tools and knowledge.”
Helping kids from an early age to develop the skills to manage money effectively, including budgeting, saving, investing, and avoiding debt has a range of benefits:
- Financial Independence: With a good understanding of personal finance, kids learn to become more self-reliant and less dependent on others for financial support.
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Improved Decision-Making: Financial literacy enables individuals to make informed decisions about spending, saving, investing, and borrowing, leading to better financial outcomes in the future.
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Debt Management: Financially literate individuals are better equipped to manage and avoid debt by understanding concepts such as interest rates, loan terms, and credit scores
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Building Wealth: Financial literacy empowers individuals to make smart investment choices and build wealth over time through strategies such as saving for retirement.
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Financial Security: Being financially literate can provide a sense of security and peace of mind. Giving your child the knowledge and skills to handle unexpected financial challenges and plan for the future.
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Avoiding Financial Pitfalls: Financially literate individuals are less likely to fall victim to scams, predatory lending practices, or other financial pitfalls that can derail their financial well-being.
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Teaching Responsibility and Accountability: Learning about money management from a young age instils a sense of responsibility and accountability in individuals, helping them develop good financial habits that can last a lifetime.
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Empowerment: Ultimately, financial literacy empowers individuals to take control of their financial futures, pursue their dreams, and live life on their own terms.
What are the key components of financial literacy?
At GoHenry, we believe there are six key components of financial literacy: earn, spend, save, invest, borrow, and protect.
Spend
Under the umbrella of spending comes a whole host of money skills that kids need to understand in order to become financially literate. Ideas and skills such as teaching kids the value of money, showing kids where money comes from and using GoHenry’s Money Missions to show them how to budget so they have enough money. Alongside is the importance of explaining needs versus wants so that your child understands the difference when they buy things.
Parenting expert and author of What’s My Child Thinking, Tanith Carey, agrees. “Learning how to prioritise spending is an important life skill. A huge part of that is working out the difference between a ‘need’ and a ‘want’ – which is the basis of all future financial decisions. The difference between ‘needs and wants’ is that ‘wants’ are potentially never satisfied. If we are exposed to enough consumer items, we will always want more. And as none of us has unlimited money, having lots of ‘wants’ is more likely to make us overspend if we don’t think about what’s motivating us to spend.”
So, be sure to talk about the desire to spend, spend, spend and what to do when your child is fixated on buying things.
Related: Needs vs wants worksheet
Save
Saving isn’t just about putting money away in a jar. It’s about knowing why you’re doing it and what your short-term goals (a new toy or a pair of trainers) or long-term financial goals (buying a car or going to university) are. It’s also about showing your child how to save and reach these goals by delaying gratification and creating saving accounts. The first step towards bringing this message home is showing kids what saving is and why it’s important to their financial stability.
Simonne Gnessen. Financial Coach, the founder of Wise Monkey Financial Coaching and co-author of Sheconomics, agrees, " It’s so important for kids and teens to understand that it pays to prioritise savings over instant gratification by showing them how to create long and short-term savings goals. Frame these savings and investments as a future gift to themselves. They'll thank you for it."
Related: Junior ISA
Earn
Earning money gives children a hands-on experience with financial transactions. They learn the value of money by earning it through their own efforts, which helps them understand its significance in their lives. Louise Hill, co-founder and CEO of GoHenry agrees. “With 75% of children agreeing that financial education will help them in their future career, our findings show how empowering children to earn money from a young age could have a lasting positive outcome on equality and job opportunities in the UK.”
Earning is also about knowing more than how to make money. It’s also about understanding how to read payslips and understand what automatically comes from your wages and why. It’s a tricky concept, which is why it’s important to take the time to explain taxes to kids. Learning about why we all need to pay taxes is an important part of improving your child's financial knowledge.
Borrow
Understanding borrowing, interest, loans, repayments and a healthy credit score is a way to ensure your child doesn’t create a large debt load for themselves as an adult. A good place to start is to teach your child about credit - what it is and why people borrow money. Then take this a step further and show your child how they can start building a good credit history and why this is important for their adult life.
Related: Explaining interest to kids
Invest
Kids need to understand that Investing can be an effective way to put money to work and potentially build wealth, which is why you need to teach your child about investing. Helping them to understand tax-free and long-term investments with cash. and stocks and shares and the stock market.
Protect
A key part of financial literacy is teaching your kids about online scams and passing on the best money safety tips for protecting your money.
Clinical psychologist Linda Blair agrees: “It’s very important to talk to children and teens about scams and to realise that it’s not gullibility that makes kids fall for these con tricks. Mostly it’s impulse control and the fact kids have trouble waiting. As a parent, you can help them avoid this by making sure you’re all informed about the latest scams and addressing the fact that they need to stop and think if they don’t want someone to take advantage of them.”
This means talking about everything from showing kids how to keep their personal details safe to creating passwords and the best digital security methods.
Activities to help children build financial literacy
As for activities to help build financial literacy it’s never too early to start. Co-author of the Cambridge University study into money habits, Dr David Whitebread, agrees:
"Experiences provided by parents which support children in learning how to plan ahead, in being reflective in their thinking and in being able to regulate their emotions can make a huge difference in promoting beneficial financial behaviour".
Give them pocket money
Regular pocket money is one of the best ways to accelerate your child's financial education and teach them to be financially literate. With GoHenry, you can set up regular pocket money payments to your child that they can manage and spend with their prepaid kids' debit card. This means that your child gets a sense of financial freedom and can participate in the economy.
Use a financial education app to boost their learning
Money Missions on the GoHenry app, kids can watch videos, take quizzes and earn points and badges to learn more about money.
Start budgeting their own money
Teach kids how to budget their pocket money, to help to set them up to have a better relationship with money in adulthood.
Set savings goals
Helping kids set up different saving pots with short-, mid- and long-term goals can help them see the benefits of saving and motivate them to keep going.
Participate in the digital economy
The British Retail Consortium (BRC) latest annual Payments Survey shows that debit and credit card transactions surpassed four in every five pounds spent in 2020 (81%, up from 78% in 2019). It's just one of the reasons why teaching children how to spend and save in the digital world is essential.
Get a summer job to earn their own money
Encouraging your kids to get a summer job is also a great way to promote financial literacy and brings into view a range of new financial experiences, from dealing with tax to working out what their time is worth.
Our Youth Economy Report 2022 found that young people are taking an entrepreneurial approach to earning, setting up their own businesses online, and doing traditional jobs such as babysitting and car washing to make more.
Get paid for doing chores to earn regular pocket money
For younger children, encouraging them to do chores and tasks for extra money is another good way to teach financial literacy skills. While this method isn't for everyone, many GoHenry parents say they have seen a real understanding of how money is earned and saved as a result.
Show them common financial mistakes
Teaching kids about common financial mistakes is crucial for helping them develop good money management skills early in life.
Spending more than you earn: Kids should understand the importance of living within their means and avoiding spending more money than they have. This includes understanding the concept of budgeting and prioritising needs over wants.
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Not saving for the future: Kids should learn the value of saving money for future goals, emergencies, and retirement.
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Ignoring debt: Kids should understand that borrowing money comes with the responsibility of repaying it and that accumulating high levels of debt can have serious long-term consequences on their financial well-being.
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Not understanding interest rates and fees: Kids should learn about interest rates and fees and how they affect borrowing and saving money. Failing to understand this can lead to paying excessive interest on loans or earning minimal interest on savings.
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Ignoring financial planning: Kids should understand the importance of setting financial goals and creating a plan to achieve them. Without clear goals and a plan, it's easy to lose track of spending and saving habits.
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Not understanding financial products: Kids should be taught to be cautious and informed consumers regarding financial products such as credit cards, loans, and investment options. Failing to understand the terms and risks associated with financial products can lead to costly mistakes.
Financial literacy resources
Financial literacy resources are invaluable when it comes to teaching your kids about money. From board games to age-appropriate explanations and fun videos, good resources have the power to instil the right money messages in a way that sticks.
Key financial terms to teach children
Teaching kids about financial terms can help them develop a foundational understanding of money management:
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A budget is a plan that helps individuals or families allocate their income towards expenses such as food, housing, entertainment, and savings. Teaching kids about budgeting helps them understand the importance of managing money wisely and prioritising spending.
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Savings refer to money that is set aside for future use rather than spent immediately. Kids should learn about the importance of saving money for emergencies, long-term goals, and unexpected expenses.
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Interest is the cost of borrowing money or the amount earned on savings and investments. Teaching kids about interest helps them understand how loans and savings accounts work and the concept of earning money through investments.
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Credit refers to the ability to borrow money with the promise of repayment in the future. Kids should learn about the importance of maintaining good credit and the risks associated with borrowing money through loans and credit cards.
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Debt is money that is owed to others, typically with interest. Kids should understand the consequences of accumulating debt and the importance of it.
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Income is the money earned from various sources such as wages, salaries, allowances, and investments. Teaching kids about income helps them understand how money is earned and the importance of managing it responsibly.
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Compound interest is calculated using both the initial principal and the accumulated interest from previous periods. Teaching kids about compound interest helps them understand the power of saving and investing early in life.
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Inflation is the rate at which the general level of prices for goods and services rises over time, resulting in a decrease in purchasing power. Kids should learn about inflation and its impact on the value of money over time.
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A credit score is a number that credit bureaus assign to you based on your credit history to help them measure the risk of extending credit to you with a car loan or a credit card.
- Financial risk refers to the possibility of losing money or failing to achieve financial objectives due to various factors. It is a fundamental concept in finance and investment and encompasses a wide range of potential adverse outcomes that everyone needs to know about.
How GoHenry can help
All of the lessons around financial literacy can be put into practice with a GoHenry prepaid debit card. It’s key to helping children from the age of six onwards to become financially responsible. From spending and saving to budgeting and learning the value of money, experimenting with their own money helps bring home the key lessons of financial literacy, enabling your child to become financially confident and capable.
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