Financial literacy: Essential money lessons for children

Highlights

• As parents, we often teach our kids several practical and life lessons over the years, however, basic lessons in personal finance are often overlooked.
• But by educating your children on how to talk and handle their finances, they will be equipped with the right skills and habits to succeed financially later in life.
• Before you even begin teaching your children about the inner workings of finance, how to put their money in good use or how to invest, you must serve as a good financial example for them. This means, learning everything there is to know about finances and investing.
• Several instances in your day-to-day life can serve as the perfect opportunity to introduce children of all ages to money matters, like discussing your spending as you shop, guessing the prices of things you see or even playing board games that feature money.
• Staring off at a young age is imperative, since the earlier you teach them about finances, the earlier they will be able to understand the importance of setting financial goals, creating a financial plan and investing for their future.
• Stress the value of saving and try to instil this habit since saving can teach your children discipline and delayed gratification, goal-setting and planning.
• Illustrate how to create a budget and cut down on expenses. Not only does a well-planned budget help you account for every cent that comes into your household, but it is vital for setting sufficient capital aside to pay for important expenses.
• Discuss the dangers of having debt, particularly that which results from small and frivolous purchases which depreciate by time, like a new car or the latest smartphone. And when it comes to debt that is unavoidable, such as a home loan, do not forget to stress the fact that they will have to pay it off every month.
• Explain how to set financial goals and let them set their own. Allow them to choose big-ticket items they would like to purchase and help them set a budget for it, while establish the steps that should be taken in order to reach this goal. In addition, encourage your kids to distinguish between their needs and wants.
• Emphasize investing before spending and how money can make money, while depending on their age, you may go ahead and delve deeper into the different types of investments available, how they work and how to monitor their growth.
• Interested to complement your child’s financial literacy by giving them a running start into financial adulthood? Get in touch with one of our financial advisors to get started.

From tying their shoelaces up to riding a bike and driving a car, as parents we often teach our children several practical and life lessons over the years. However, basic lessons in personal finance are, more often than not, overlooked. For many, money tends to be a taboo subject, in part due to our own lack of knowledge or bad financial habits. Yet from buying daily necessities, such as food and clothing to purchasing a property, paying for education, holidays and entertainment, money is central to transacting life, day in and day out, so without a working knowledge of it, it can be very difficult to do financially well.

By educating your children on how to talk and handle their finances, you will be laying the right foundation on which they can built upon as they grow, while you would be helping them to develop skills and habits that will get them off to a good start and place them in a better position to succeed financially later in life.

With this in mind, have a look at some top key money lessons to spur on your children’s financial literacy.

Why should you teach kids about money?

From equipping them with the right knowledge and skills they need to manage their money effectively both now and later on to ensuring that their financial future will be more secure, children who do better with money tend to have parents or carers who actively talk to them about it, give them responsibility for spending and saving from an early age, while educate them early on about the importance of investing.

Ultimately, having recurring conversations about this subject, will help build your children’s confidence on the subject, while it can boost their financial skills, which will help them in their future.

Why should you model good financial behaviour?

Before you even embark on teaching your children about the inner workings of finance, how to put their money in good use or how to invest, you must serve as a good financial example for them. For instance, there’s no use of complaining about having to spend too much on certain things, only to take your kids on a shopping spree or buy them the latest toy they have requested that costs a fortune. By doing so, you would be sending mixed messages, so instead, practice what you preach and do so with consistency. Face any financial issues you may have head-on and ideally, seek advice, particularly if you have not drafted a financial plan, need to set goals for the future or you would like to start investing and you do not know how. Seeking professional help can also serve as a great example for your kids.

Here are some basic things to remember:

• Learn about finances and investing yourself – It goes without saying that you cannot teach what you don’t know. Make sure you take the time to learn about saving, investing, creating a solid financial plan and other related topics. A good option is to go through some educational material.
• Set a good example – It is a well-established fact that children follow what they see rather than what you say. If you hope to teach your children about controlling their spending and investing wisely, you have to do it first.
• Teach your kids one thing at a time – Finance and investing can be quite complex topics particularly if your children are young. While they may show some enthusiasm, remember that they cannot become financially savvy overnight. Teach one lesson at a time and ideally, over the course of their childhood. As long as you put in the effort and make it a long-term and continuous goal, you will instil good habits that will serve your children well.

How can you teach children about money?

Naturally, you cannot be expected to know everything about money before you begin teaching your children about this important concept. However, the more you think about the topic, the more you will realise that these lessons can occur naturally through several moments in your day-to-day life which you can use as the perfect opportunity to introduce children of all ages to money matters. Some simple daily examples include discussing your spending as you shop, explaining the pitfalls of impulse buying, guessing the prices of things you see on television adverts, saving for a specific goal as a family or even playing board games that feature money. You may also want to share some mistakes you have personally made and explain what you did to overcome them.

Below are some basic investment concepts to introduce:

Start at a young age

Your pre-schooler might not fully grasp the idea of finances and how markets work, nonetheless, the earlier your start your child’s financial education, the better, since the earlier you teach them about finances, the earlier they will be able to understand the importance of setting financial goals, creating a financial plan and investing for their future. You do not need to go big with this one. Introducing them to coins and paper bills, explaining what money is and how it is used and actually showing them how money works can be very effective.

Stress the value of saving

In all likelihood, your kids’ early interactions with money will involve spending, by way of observing you as you go along purchasing things. Having said that, it is important to teach them that money is not just for spending by instilling a habit of saving. Saving can teach your children discipline and delayed gratification, goal-setting and planning. So if for instance, you have chosen to reward your child with weekly pocket money for general chores around the house, encourage them to save up for something they want rather than spending it right away. In this manner, they will be able to see that by putting just a few euros per week aside, this can add up to a substantial amount over time. If anything, it is a lesson in patience. Learning this value of delayed gratification will help them as they get older to be able to save for longer-term goals. In fact, have a look at the benefits of a drip-feeding approach.

Illustrate how to create a budget and cut down on expenses

Perhaps one of the most basic financial lessons you could teach your children is creating a budget and living within your means. A well-planned budget does not only help you account for every cent that comes into your household, but it is vital for setting sufficient capital aside to pay for important expenses like your home loan or your children’s education. It should also include things like food and clothing. In fact, budgeting can be a family activity. Talk to your children about a financial goal that you may have, such as saving up for a holiday or a new car, then decide how much money you will need to achieve this goal, while you collectively take into consideration what family spending is necessary and what could be sacrificed to save up for this goal.

Discuss the dangers of having debt

For some debt is seen as a disastrous situation, for others, it might seem like one way to get the things we want right now, instead of having to wait until we have saved enough money. And while not all debt is unavoidable, if you do not stay on top of it and model good management for your kids’ sake, this could come at a cost. One way of teaching children about debt is to discuss about things like loans and credit cards. Help your children understand that these can serve as a useful tool to purchase important and big-ticket items like a house, but the same does not apply for small and frivolous purchases, particularly those that depreciate by time like a new car or the latest smartphone. And do not forget to stress the fact that they will have to pay off their credit card or loan every month.

Closely related to debt, you must also talk about the trap of impulse buying and the importance of pausing before buying something so as to weigh the costs and their need.

Explain how to set financial goals

Whether it is getting out of debt, building a retirement fund or saving for that dream holiday, we all need to have financial goals and it is these very same targets that drive us throughout life. Children can also learn this important lesson by letting them choose expensive items they would like to purchase, such as a tablet and help them set a budget for it, while you can establish the steps that should be followed in order to reach this goal, like taking on additional chores around the house to earn more money or thinking of ways to spend less of their allowance.

Yet, there is also something else to be taught here. When it comes to our finances, as adults we can distinguish between our needs and wants, often first covering our need and then, getting the wants in our life if there is money left over. As your children move into the real world, they must know that come payday, their salary must first cover their basic expenses and then they can splurge on things like going out with friends and making other purchases.

Emphasize investing before spending

Investing is a great way to make additional money with little to no work and while saving can be a great habit, investing can teach your children to build wealth. Once your kids can understand the benefits of living below their means, the next step is to emphasize how money can make money. Whether they are earning their first allowance or their first pay check from their summer job, show them the value and rewards of putting money away for the future. Just remember that investing works best when the money is not needed for any short-term goals, but rather, for long-term objectives. Depending on their age, you may go ahead and delve deeper into the different types of investments available, how they work and how to monitor the growth of their investments.

It might also be a good idea to introduce them to the magic of compound interest and why the earlier they begin investing, the better. Compound interest is interest calculated on the initial principal you have invested, which also includes all of the accumulated interest from previous periods on a deposit or loan. By introducing the idea of compound interest, you are giving your children a head start to preparing for their future. In addition, watching your money grow each month can be a fascinating learning journey for children.

Investing for your children

As a parent, it is only natural that you want the very best for your children. While you strive to build a solid foundation for them so that they can grasp every opportunity in life, dedicating some time to teaching them about investing and finances, can help give them an edge in life.

However, if you would also like to give them a running start into financial adulthood, you must ensure that saving and investing for your children’s future forms part of your financial plan. From helping them out with their higher education to their wedding and purchasing their first property, it may seem daunting to plan so far in advance, but like any other goal, this one too needs meticulous planning. So if you have decided that the time is right to start putting money aside for your child, you may be wondering what is the optimal method to do so. Boasting a wealth of experience and having access to a full range of investment products, Calamatta Cuschieri’s financial advisors can offer you bespoke advice that matches your personal circumstances. Get in touch with one of our financial advisors to get the necessary help and support.