What is financial literacy?
Financial literacy is the ability to make financially responsible decisions as a part of your everyday life, from saving and investing to spending, earning and borrowing.
The importance of financial literacy
At GoHenry, teaching kids to be financially literate is our number one priority. We aim to make every kid smart with money and show that financial education doesn't have to be boring. It can be fun, practical – and help with the transition into adulthood.
“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. Recent 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 financial decisions they make during the rest of 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 everyday 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 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 87 percent of young people wanted to know more about specific financial products, and 77 percent said they wanted to be taught how to budget and save before they went out into the world.
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. The advantages of teaching financial education means that all children and young people will have the skills they need to plan for the future, remain solvent and avoid getting into problem debt later in life.
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 Beth Zemble, VP for Education, 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 to 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.”
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.
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. Also be sure to talk about the desire to spend, spend, spend and what to do when your child is obsessed with buying things.
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: Guide to children's savings accounts
Earning isn’t just about knowing how to make money, it’s also about understanding how to read payslips and understand what automatically comes out of 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 tax is an important part of improving your child's financial knowledge.
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
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.
A key part of financial literacy is teaching your kids to be aware of online scams and passing on the best money safety tips for protecting your money. This is everything from showing kids how to protect investments, 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.
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.
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.