April is Financial Literacy Month, and teaching the next generation how to be financially independent can be one of the greatest gifts you give to your children. Too many millennials and members of Generation Z graduate high school without understanding even the basics of personal finance, such as balancing a checkbook. Sure, they understand how to use smartphone apps to pay for coffee or send cash to friends for concert tickets, but they don’t know anything about managing their money.
Financial literacy doesn’t just happen; it needs to be taught, which is why iQ Credit Union and other financial institutions offer classes to promote financial literacy. Student loan debt, for example, is placing a huge burden on young Americans who are just starting out. Research shows 54% of young Americans worry they can’t repay their student loans, and 43% are not even making payments. Research also shows that 44% of Americans don’t have a $400 emergency fund, and 38% of households are carrying credit card debt.
Financial Literacy Basics
To promote financial literacy, we need to teach our children some of the basics of money management. There are a number of financial lessons that need to be taught, but to promote better understanding, it’s a good idea to consider some basic umbrella categories:
1. Budgeting: The basics of household budgeting are a lesson everyone should master. Most kids grow up with a simple concept of money—if there is cash in their pocket, then they can spend it. Planning out spending to ensure your money can cover all of your expenses is a foreign concept. Work with your children and teach them about income versus expenses. Show them how to create a balance sheet that matches the amount of money coming in against household costs. Many households live from paycheck to paycheck because simple math says you can spend what you earn. Proper budgeting will result in better money management and help you plan ahead to save what you need.
2. Needs versus wants: As part of budgeting, it’s important to understand the difference between needs and wants, a concept many people struggle with. You need things such as food and shelter, but you want things such as more expensive clothes and entertainment. If you don’t have enough income to cover expenses, then you have to make hard decisions about how to spend your money. Everyone knows how to spend money, but how many people really understand smart spending? An important concept that eludes many people is spending represents a tradeoff; once you spend money, those funds are no longer available for other needs.
3. Savings: Americans today do not save. In fact, 58% of Americans have less than $1,000 for emergencies, and one-third of Americans have less than $5,000 in retirement savings. Teaching your children to set money aside for the future is probably the most important financial lesson you can teach them. You should plan to save for both short-term (6-12 months) and long-term (five years or more) goals. At the very least, show them how to save for emergencies. You should have at least two weeks’ pay saved in case of emergency; ideally, you should have three months’ living expenses saved in case you become ill or lose your job. Calculate how much you need and create an emergency fund.
4. Credit and debt: We already mentioned the challenge of student loan debt. Unfortunately, many college students sign student loans without truly understanding the consequences when they graduate. When those loan bills come due, there is sticker shock. Teach them about credit and how to assess fixed-rate loans such as student loans or mortgages. Also, teach them about revolving credit. Credit card debt is a growing problem, and you should show your kids how to properly manage credit card spending.
5. Repercussions: Impress upon your children that failure to manage their money wisely has repercussions. Some of those consequences can be immediate, such as being unable to pay the rent. Others are more far-reaching, such as the negative impact on your credit score. Teach them that personal finances require timely attention.
The Tools of Personal Finance
Your local financial institution has a variety of tools that can assist you in promoting financial literacy. In addition to educational programs and classes, banks and credit unions have information about checking accounts, savings accounts, certificates of deposit (CDs), individual retirement accounts (IRAs), and other financial tools that can help shape your children’s financial future. Most parents start their kids early with a simple savings account, but as they grow older, you should consider having them open their own checking and credit card accounts (many financial institutions let you put a lower limit on credit cards for teens).Be sure to educate your children about the difference between a bank and a credit union. When it comes to helping you get off on the right financial foot, credit unions tend to offer more personalized services and are committed to helping their members manage their money. iQ Credit Union, for example, has its own financial literacy program. It’s in everyone’s best interest to make sure your children are prepared for their financial future, and you can be sure iQ Credit Union is available to help.