Every parent understands the importance of being financially stable. They know how difficult it is to make and keep money, but most importantly, how difficult it is to grow money. Due to money being such a difficult matter, they shy off exposing their children to such heavy matters. They prefer not to burden their children.
In their school of thought, the child can always learn about money later, but later never comes, and it gets too late when their children have to learn about money through trial and error, just like their parents. Therefore, parents should introduce their children to finance as early as possible because it is the only way to cushion their child against the vicissitudes of money matters.
The first step to teaching financial literacy is to have a good financial understanding as a parent. It is, therefore, essential that you invest in your financial learning so that you can transmit the right financial habits and perspectives to your children.
You must teach them what financial independence means since it means different things to different people. For some people, it might mean having control of their time. For others, it might be being able to travel the world, and for others, it might be having a great retirement plan.
For your child, it might be being able to afford a slightly more expensive toy, buying themselves the snacks they like or just having a jar full of money saved. Nonetheless, you want them to experience the peace of meeting their needs and wants by properly managing their finances.
Secondly, when your child grows up being financially savvy, they are most likely to understand the economic situation even on a global scale. For instance, in Kenya, fuel prices are rising unprecedentedly. As much as the current regime has a role in managing fuel prices, many other global factors affect the price of fuel. However, discussing such global matters without getting into details is not viable for most Kenyans since they do not understand how the global machinery works.
Financially savvy children will not have this problem in their adulthood. Understanding global finance issues will enable them to make the right financial decisions regarding where to work, how to save, and where and when to invest.
Of course, such complex matters cannot be taught to three-year-olds, but as soon as they hit teenage, they are mature enough to understand the finance dynamics at home and the global finance dynamics. In their curriculum in school, they have started learning about other countries; hence, this is the ripe time to introduce the conversation. However, you must have started the conversation earlier when they were younger because they will not understand what you are trying to teach them if the topic comes out of the blue.
But before you get things to a global scale, let us just start with the basics. The basics of finance start with understanding what money is, how it is made and stored, and how it is grown.
The best way to introduce your child to what money is is to take it back to the age of barter trade. When people used to exchange value for value in terms of goods and services. The value of their goods and services was relative. It was subjective to the individuals transacting.
At home, you can run a simple barter trade. You can exchange 30 minutes of doing homework with 30 minutes of watching TV. This way, the child starts to understand that there are tradeoffs to be made for one to do the things they want to do.
This also helps them understand the value of time and the few resources they have at their disposal. Once they understand the concept of value and trading value, you can introduce the money conversation.
Money is just a currency. A currency is a store of value. Only after they understand what value is can they understand what money represents.
For instance, when you start giving them allowances for doing chores around the house, they can understand that they will need to offer value by cleaning dishes ten times to get enough allowance to buy them a toy they want. They now have the right framework of what it takes to have a toy.
Once children understand that money is a store of value, then you can take the conversation a notch higher and discuss saving and budgeting.
There are things we want in life, but since they have a lot of value, we have to store up our value in the form of money to afford them in the future. To store that value, we have to balance the now and future needs, hence the need to budget.
For instance, your child loves chocolate. They want to buy chocolate as soon as they get their allowance, but they also would like a toy upgrade. From a value perspective, You can explain why the toy they want is more expensive. They relate that with the value you pay them to deliver doing home chores. They will realise that the two are not commensurate. Then, you teach them that budgeting and saving is the way to achieve their goals.
Budgeting is the simple alignment of our needs and wants with our goals. Therefore, you might show them the importance of foregoing some of their chocolate to save up for the toy. In the budget, let them understand how many chocolates they should sacrifice to buy the toy.
Having a conversation based on value rather than cold cash alleviates a lot of parents' apprehension when the topic of money springs up.
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Once they understand finance's earning, budgeting and saving concepts, you can elevate the lesson to include debt and credit.
Debt and credit are value paid in advance. When you go to the bank to take a loan, they ask for security, whether it is collateral or an earnings report. This is to prove to them that you can create enough value in the near future to pay them back their money.
You can then start having deals with your child. Since they want the toy now and do not have enough value to afford it, you can give them the money, but then they would have to work for a certain amount of time or a certain amount of chores to pay back the toy. This way, they get the toy earlier and have more fun while doing what they need to do to pay back the toy.
Introducing your kids to the concept of credit eliminates the debt scare that most people have. The kids will understand that debt is a tool, and as long as they are willing to work to pay it off, it can be beneficial. Secondly, they will learn debt management skills. They will know that you do not take debt just because, and they will understand what it means to be committed to a debt.
Understanding investing is the pinnacle of financial literacy. Now, at this point, the child has learned what money is, how it is used, and how to save it. It is high time they learn how to grow it. Only after they master how to grow it can they truly achieve financial freedom.
Here is where you teach them that buying chocolate and toys is good, but saving up for more tomorrow is better. You can start this at home by incentivizing them to take their allowances later to allow them to earn interest. This cultivates delayed gratification.
On the other hand, you can open up a bank account with them. This is ideal because you will transition them from home finances to the actual financial system. They learn how much interest banks pay, transaction costs, and relationships with the bank and bank employees. Getting them a bank account at a young age does more for them than just earning interest.
At this time, you can also observe to see if they have entrepreneurial tendencies. They want to offer value at home and to others in your community. Once they show these tendencies, fan them because whether they become entrepreneurs in the future or not, they will learn so much, and the concept of value will be ingrained in them.
Read Also: Fun Ways to Teach Your Children About Money
Nevertheless, the most important is to be a good financial role model. Children learn by observation. Hence, you cannot be preaching water and drinking wine. You, too, must be committed to making the right financial decisions they can model their life around.
Money can be a complex idea to introduce to children because aside from the physical transactions we have with money, money comes with many emotions. However, understanding money from the concept of value and teaching it from that perspective provides an entry point for the children and sets a strong foundation for how they will transact in the future.