Financial literacy for kids: Why is it important?

Financial literacy for kids: Why is it important?

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 COO 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.

 

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.

 

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.

 

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.

 

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.

 

  • Spend - understanding the value of money, where money comes from and how to budget to have enough money.
  • Save - knowing your short (a car or holiday) and long-term (retirement) financial goals and how to reach them by delaying gratification and creating saving accounts.
  • Earn - knowing how to make money and understanding income and taxes.
  • Borrow - understanding borrowing, interest, loans, repayments and a healthy credit score.
  • Invest -understanding tax-free and long-term investments with cash and stocks and shares ISAs and the stock market, 
  • Protect - knowing how to protect your investments and money with insurance, digital security and avoiding scams.

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:

 

"In today's world, there are many pressures on young children and their families, which make financial education increasingly important. The 'habits of mind' which influence the ways children approach complex problems and decisions, including financial ones, are largely determined in the first few years of life. Simply imparting information is now recognised as being ineffective in this area. By contrast, early experiences provided by parents, caregivers and teachers 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 pocket money kids are able to have learning experiences (overseen by the caring adults in their lives) with their own money, which will help them develop money confidence and further develop their skills,” says Beth Zemble. “Was it a good purchase?  Are they happy or sad that they spent their money? Do they wish they had saved for something else?  Giving your kids pocket money isn’t just about giving them money – it’s giving them the opportunity to grow their skillset to become more capable and independent adults.”

 

With your GoHenry parent app, you can set up regular pocket money payments to your child that they can manage and spend with their prepaid 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 is designed to help accelerate your child's financial education. Kids can watch fun, animated videos, take quizzes and earn points and badges. You can use your GoHenry parent app to track your child's progress; when each lesson comes to a close, another one begins, and your child will unlock new levels as they progress. 

 

Start budgeting their own money

 

When you teach kids how to budget with their pocket money, you help to set them up to have a better relationship with money in adulthood. The easiest way to do this is to explain that a budget is a weekly spending plan that starts with the amount of money coming in and then tracks money going out so that they always know how much they have left to spend. 

 

For example, if they get £6 pocket money a week on a Saturday and want to spend £3 on a toy. Explain that they only have £3 left for the rest of the week and have to spread this money out (budget) to ensure they have enough left for the remaining seven days. 

 

Set savings goals

 

It can be tricky for kids to understand why it's crucial to create a budget and make wise spending choices, especially when they enjoy spending their pocket money! 

 

Helping them 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 and not spend everything right away.

 

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. The GoHenry prepaid debit card for kids gives kids the option to participate in the digital economy by paying online and in-store as well as saving online, tracking their spending via the app and setting up savings goals.

 

Start investing with a Junior ISA


A Junior ISA (Individual Savings Account) is a long-term, tax-efficient savings account. Only a parent or guardian with parental responsibility can open a Junior ISA for a child, but anyone can pay into it. Each tax year, you can pay up to £9,000 into a Junior ISA, and the money is locked away until your child turns 18. Opening a Junior ISA can also help to show your child the importance and benefits of long-term saving for the future and form part of their financial education.

 

Get a summer job to earn their own money

 

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.

 

Encouraging your kids to get a summer job is also a great way to encourage financial literacy. It shows them the benefits of earning and brings into view a range of new financial experiences, from dealing with tax and payslips to costing their services and products and working out what their time is worth.

 

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.

 

Use GoHenry

 

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.

 

Find out more about GoHenry

 

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What age can you get a debit card?

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Written by Anita Naik Published Oct 24, 2022 ● 6 min. read