What is financial literacy?
Financial literacy is the ability to make financially responsible decisions integral to 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.
According to the Milken Institute, only 57% of US adults are financially literate. This is largely due to a lack of financial education both in schools and at home. Unfortunately, this means that many households struggle to make ends meet, with little knowledge of how to save or invest for the future.
To remedy this, it's important to educate the next generations about money and how to manage it responsibly. After all, they are the future of our economy! Studies have found that financial habits are formed by the age of seven, with most young people forming the core behaviors that will affect the financial decisions they make during the rest of their lives.
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.
Related: How your state is teaching financial literacy
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 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?
There are many benefits to teaching financial literacy, including economic confidence around saving, spending and earning, strong decision-making for long-term investment, less debt overall and a good credit score for life. Studies show that students who are taught personal finance courses from a young age are more likely to take out lower-cost loans and grants for college instead of private loans with high interest rates. This is just one way that being financially literate can impact your child’s future.
“Financial literacy also 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
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.
Related: Budgeting for kids, 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 sneakers) or long-term financial goals (buying a car or going to college) 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.
Related: Kids savings account guide
Earn
Earning isn’t just about knowing how to make money, it’s also about understanding how to read paystubs 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.
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 and the stock market.
Related: How to talk to kids about the stock market
Protect
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 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 an allowance
A regular allowance is one of the best ways to accelerate your child's financial education and teach them to be financially literate.
Beth Zemble says, “With an allowance 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. Was it a good purchase? Are you happy or sad that you spent your money? Do you wish you had saved for something else?
Giving your kids an allowance isn’t just giving them money, it’s giving them the opportunity to grow their skill set to become more capable and independent adults.”
Related: How much allowance to give kids, Kids debit card
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 allowance, 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
US reports show that only 19% of payments are made using cash, as most payments are made with debit cards (28%) and credit cards (27%). It's just one of the reasons why teaching children how to spend and save in the digital world is essential.
Start investing with a Roth IRA
A Roth IRA is a great investment tool for people of all ages. With a Roth IRA, you can invest your money and watch it grow tax-free. When your child retires, they'll be able to withdraw their money without having to pay any taxes on it. Opening a Roth IRA can help show your child the importance and benefits of long-term saving.
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 to earn more is also a great way to encourage financial literacy.
Get paid for doing tasks to earn a regular allowance
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.
Related: Free financial literacy classes for kids, Books to teach kids about money
How GoHenry can help
All of the lessons around financial literacy can be put into practice with a GoHenry prepaid kids' 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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