The concept of financial literacy refers to the ability to understand and use financial skills in an effective manner. There are several subsets and categories that fall under the umbrella of this term, including budgeting, management, and investing. Being financially literate allows you to develop a positive and sustainable relationship with money, meaning that you avoid financial difficulties and can live a life that is both comfortable and content. The best time to start learning about how to deal with money on a daily basis is during childhood since forming good habits during the formative years means that it will be difficult to stray in the wrong direction later on. 

But how exactly should you proceed when looking to teach these kids about money, how to save, and what they should consider before spending? 

The skills 

In order to be effective at managing funds, people need a sophisticated set of skills. Apart from basic mathematics, you should also prioritize budgeting, learn the essential terminology, and teach about the emotional regulation necessary to avoid overspending. In a world full of temptations, with items that could be purchased surrounding you from all sides, both in real life and online, it’s important to set firm but realistic boundaries to stick to so that you don’t risk acquiring massive amounts of debt. 

A Cambridge University study has revealed that sound financial habits are formed by the age of seven. Most children form some core behaviors by that age, which end up influencing the decisions they will make throughout their lives. While it is not impossible to change later on and develop healthier ways of dealing with money, it may take more effort, and sticking to the new rules will seem more challenging. 

The glossary 

Financial matters have a very specific terminology, and if you want your child to become more adept at money matters, you need to teach them about the most important terms. “Budget” is one of the fundamental ones that can find practical examples of saving pocket money so that children can buy some of the things they want on their own, something that will make them feel more independent and empowered. The difference between credit, credit card, and credit score must also be outlined so that there’s no confusion about the fact that one refers to a borrowed sum of money, the second to a tool used to access the borrowed money, and the third to a number that is based on your entire financial history, and which makes the lender more or less likely to borrow you even more money in the future. 

If you want to get into assets and portfolios, you can do so, but remember that this is more in-depth knowledge that is more accessible after the foundations have been laid. You can teach about how to buy crypto currency, invest in stocks, bonds, or real estate, and differentiate the riskier holdings from those that are more secure and more likely to yield higher returns. Some of the other basic financial words that should be part of your children’s financial education include deposit, exchange rate, inflation, interest, loan, savings, and stock market. 

Daily learning 

Providing children with practical examples will help them tremendously. While there’s no denying the importance of theoretical knowledge, practical learning is just as essential. There are many ways to teach kids about the importance of money. Making them earn their allowances by completing chores is one of them. This will enable kids to see that earning money takes effort so that they don’t end up taking money for granted. Each task they complete should be rewarded differently, depending on the difficulty level and the time it took to complete it. 

The kids who are old enough can get a part-time job, such as walking a neighbor’s dog, which doesn’t just provide them with extra cash but gives them a sense of responsibility as well. And since children often have a lot of demands about the things they’d like to get, you can ask them to contribute to the cost. This way, they can see exactly how much it costs to get a non-essential item. Teaching this step is essential so that children remember that there’s only so much disposable income every month that can go to discretionary purchases. 

Talk about it 

Financial matters are commonly a source of discontent within families, and the conversations can sometimes get very heated. This isn’t a healthy and sustainable way to approach things, as it can make your children feel like money is a taboo subject. Simply starting a conversation can induce an anxiety response in them if they become used to hearing unconstructive arguments about money. The only way to escape this pitfall is to be honest about your family’s finances and be open to discussion. Make sure your children know that you are always ready to answer their questions. 

If you’re not sure about some of the answers, it’s better to take some time to do your own research and then return with a response. Be honest about this aspect, too, since your children must understand that learning is a constant process, that it’s impossible to know everything, and that there’s no shame in not having all the answers right away. 

Savings 

Saving money can be challenging, especially for children. Many may want to spend everything they have on something they want, and while spending money on hobbies and personal items is completely fine and can even count as a form of self-care, it’s essential to set some boundaries. This means that children will be less likely to see frequent splurging as a positive, emotionally rewarding activity, but rather as something that they do sometimes for an expense that is justified. The best way to start with young children is with a tried-and-tested piggy bank. 

When they get their allowance or some extra pocket money, talk to them about whether they’d want to spend it right away or prefer saving it in order to get something more expensive at a later time. Teaching about delayed gratification is not simple, but it makes children more mature and level headed, so it is worth the effort. 

Many parents wrongly assume that children don’t require financial education, believing that they will somehow develop good money management skills on their own when they start earning a steady wage. But learning the basics as a child is what makes for an adult who can make sound financial choices.