April is financial literacy month. So naturally, Econogal needs a post with tips on teaching financial literacy. Fortunately there are many ways to engage young people in learning financial responsibility. Even the youngest of children can appreciate a piggy bank.
In fact, two of my children received piggy banks from the OB-GYN who delivered them. At least one of the others was gifted a bank at a baby shower. Piggy banks are a fun way for the young child to begin saving. Some banks use piggy banks as marketing items.
Once the banks are filled, the kids can either roll the coins or use a coin sorter. The age of the child will determine the needed coordination to roll coins. A few banks will even allow kids to watch their large coin sorter. Just ask the next time you go to your bank.
Credit Cards versus Lay-away
Saving coins is just the first step. Many other lessons are needed. One of the most important is budgeting. In these days of plastic payment it can be especially difficult for kids to understand how transactions work. A swipe of the card at the check-out does not help with the concept of budgeting and payment in the same way as putting an item on lay-away. But the two are similar.
Although lay-away still exists, it is far more common to buy with a credit card. Both involve multiple payments. But with the credit transaction there is instant gratification. This is a two-edged sword. The item isn’t truly owned until paid in full. Many individuals forget this key concept. Using credit to buy expensive items or charging large amounts on services or vacations is a sure way to find yourself underwater financially.
Thus, if you have a store that still offers lay-away, consider using this avenue to teach the idea of budgeting. The child will understand the need to save to make each of the regular payments. The item will belong to them at the end of the lay-away. If this type of payment is not available, create your own system at home. Have the child put aside a certain amount each week until the amount needed for purchase is needed. Then go to the store. We need to get away from instant gratification.
Allowances or Earnings
Some families provide allowances. Others exchange payment for chores upon completion. Still others expect kids to pitch in as part of the family responsibility. Regardless of your methodology, kids can learn to participate in work at an early age. Work ethic is an integral part of financial responsibility. It is important to teach the concept of the exchange between work and pay.
Continue to emphasize savings. Either encourage or require the deposit of some of the allowance or chore earnings into a bank account. If possible, consider a small match of savings. This concept found in the working world of employee match for 401K deposits is important. Many individuals lose out by not contributing to these retirement accounts. Introduce the idea at an early age.
A problem faced by teenagers (and adults) is not knowing where all the money is going. A great exercise is keeping track of all expenditures in a month. All means all, down to the very last cent. For this exercise to work, several things are involved.
First identify income sources. This should include wages from part-time jobs, allowances, and gifts. College students can include scholarships and work-study.
Second, estimate how the money is spent. For example, a third is going to gas, a quarter is deposited in a savings account. The remainder might be broken into multiple uses.
Next, create a record. This can be as simple as a folder with notebook paper. Or an accounting ledger book could be used for those interested in accounting. The record needs to identify each day of the month. After creating separate daily logs, the information can further divide. Additional divisions could include categories such as food, rent, gas, and of course discretionary spending. Receipts should be kept.
Then, at the end of the month, analyze the expenditures. This is eye-opening. My students often discovered a large amount was spent on fast food even though they were paying for the college food service. Others underestimated daycare expenses because they did not include babysitting during evenings. The analysis is key in understanding spending habits. Unfortunately few save any money at all much less a quarter of the income.
These are just a few ideas for teaching financial literacy. While some states have incorporated financial literacy in the curriculum, parents need to take the lead. Start with a piggy bank and move onto a coin sorter. Kids are interested in how money works. Help them out by introducing financial responsibility at an early age.
Make sure budgeting is a concept they know and understand. Unfortunate events can wipe out a family, but far too many are in trouble from out of control spending. Instant gratification needs to be replaced by the satisfaction of payment in full. If you use credit/debit cards instead of cash, make sure the youngsters understand the payment transactions involved. An increase in the savings rate is necessary for long-term financial stability. Share this habit with your children.