financial literacy for kids

Financial Literacy: The Earlier you Start, The Better!

Recently I met two different families at a family event. Both the families are young parents having children who are nearly 6 years old. I noticed a peculiar difference in their parenting styles. Let’s call these families as A and B.

The child from Family A suffers from “I want it syndrome”. This kid is highly demanding and craves for (expensive) things and naturally makes the lives of its parents miserable with its demands. The parents, often give in to the child’s demands in order to avoid ugly temper tantrums and confrontations.

Financial literacy for kidsNot an ideal way to tackle with your child’s tantrums

The parent from Family B has a different approach when it comes to dealing with their kid’s demands. They believe that buying whatever the child wants – or giving them money whenever they ask for it – leads to a sense of entitlement and the false notion, that things will forever be this way. They want their child to know the value of money. They believe in what is called “delayed gratification”. According to their belief system delayed gratification builds up one’s resistance to spend impulsively and improves their ability to make sound decisions, including financial decisions. 

Delayed gratification builds up one’s resistance to spend impulsively and improves their ability to make sound decisions, including financial decisions.

I am not here to judge which parenting style is best, but I resonate with the parenting style of Family B. Parents usually focus on inculcating discipline, good manners and other healthy habits, but overlook the importance of imparting financial literacy to their kids.

Financial literacy for kids

Why? I think it is because many parents believe that kids are too young to understand money. Another mistake that parents make is that they assume that kids will learn about personal finance in school. Unfortunately, that is not going to happen. Our education system will not teach our children on how to spend money wisely. Surely, you wouldn’t want your kids to grow up into adults who are reckless about money matters, living from paycheck to paycheck! Such people are often in debt and are always whining about the lack of money in their lives.

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I recommend that you start money-related conversations with your kid early. Perhaps, even before they know math and numbers. The sooner you begin to teach your kids, the more time they will have to develop healthy financial habits. You can begin by teaching children about the relationship between earning, spending and saving, to help them understand the value of money. These are valuable lessons that will stay with them for life.

Financial literacy for kids

However, lecturing them isn’t the best method to teach kids about money. It’s far more effective if you help your kids learn through hands-on experience.

Here are a few simple ideas for incorporating financial literacy lessons into your child’s live:
8 Tips to Introduce Financial Literacy for Kids
1. Where does the Money come from?

financial literacy for kids

Children think that money is boundless and it requires no effort to earn it. You can start by teaching your children that when you go to office and work, or when you are rendering a service to someone, you get paid. Therefore there is effort involved in earning money. And it is this money, so earned, that you spend when you buy things for the house. You can also help the child to understand that even if money has different forms, the essential properties remain the same. For example, explain to them that when you use your credit or debit cards (or Paytm) to pay for groceries, it is equivalent to paying cash.

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2. (Almost) Everything costs Money!

financial literacy for kids

Next thing that children need to understand is that almost everything that we see in shops or buy online costs money. Young children do not have the conception that products and services cost money. You can make your child understand this rather easily by talking to them about how much each product costs. Putting a number (cost) to each purchase will help children realise that there is a non-zero value associated with every item. Gradually they will realise that some products are more expensive than others.

3. Balancing Needs and Wants

financial literacy for kids

Kids have a natural tendency to yearn for flashy (and expensive) stuff. They should be taught how to prioritize their needs and wants. Parents should explain to kids that why we don’t (and can’t) purchase everything we desire. This will be a great first step in getting kids to understand that one almost always has to prioritize one’s purchases. They will be ready to understand this concept only if they understand the first two points (that money is limited and that everything costs money).

4. Forms of Prioritization

There are three common forms of prioritization when it comes to buying a product:

  • Cannot buy this product as I need something else more and I have only a limited amount of money  
  • Will buy something similar but that which is cheaper (as I have only a limited amount of money)
  • Cannot buy this now (as I have only a limited amount of money) but will buy it in future when I have enough

You can help your child understand these prioritizations if you can explain your thought process while making purchase decisions in everyday life. You can pose these as choices and ask your child to select. And since this is all about prioritization, I recalled one great movie which is apt to show to your kids about the importance of setting priorities in one’s life.

5. Get them involved in real-life purchase decisions

financial literacy for kids

As the next step, you can include your children when making real-life purchase decisions – starting with the weekly grocery trips. Start by setting aside a budget for a set of items (e.g. Rs.100 for milk, eggs, bread). Here, you can carry out price comparisons with them by choosing items that are on offer while keeping to the set budget for the items required. Through this exercise, you are essentially teaching them simple budgeting skills that will definitely come in handy later. You will also help reinforce all the concepts (1 to 4) that we talked about above.

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6. Piggy Banks

financial literacy for kids

Collecting money in a jar or piggy bank works well when kids are young. You can make the most of this by introducing the various coin denominations and putting money into a piggy bank. The more they practice this, the concept of “saving” through the piggy bank will become second nature to them.

7. Learning Through Games

financial literacy for kids

Games can be a great way to teach children what money is, how it’s used and what its value is. Playing money games with your kids makes learning fun and encourages children to ask questions about money. There are popular money games for kids which you can buy like Monopoly, Game of Life, Payday, Moneywise Kids, Money Bags, and Easy Money. But do be sure that the game you select is appropriate for your child’s age and areas of interest.

8. Lead by example

financial literacy for kids

Parents are the biggest influence on a child’s financial education and money habits. If you do not practice what you preach, no amount of lecturing your child can help in its financial literacy.

Bottom Line:
  • Financial literacy for children is important.
  • Starting financial education at an early age, at home, sets the child up for the life ahead.
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How are you helping your kid to be money wise?

Share your experiences in the comment section.

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