Everyone strives for financial independence, but to achieve it you need to understand the basic principles of money management. That’s why teaching financial literacy at an early age is so important. You are never too young to start learning about budgeting, saving, credit, and the basics of personal finance, and because this is Financial Literacy Month, it’s an ideal time to start teaching financial literacy to your children.
A growing phenomenon among those entering the workforce is FIRE: financial independence, retire early. The idea is to earn as much as possible when you have earning power and save up to 70% of your income toward retirement. By combining a large salary, modest lifestyle, and smart investments, you can achieve financial independence quickly and consider an early retirement. Of course, implementing such a strategy requires an understanding of finance and investment that goes well beyond basic financial literacy.
What We Mean by Financial Literacy
The term “financial literacy” has different definitions depending on whom you ask. The National Financial Educators Council defines financial literacy as “understanding the topic of money.” The goal of teaching financial literacy is to increase confidence, improve decision-making, and promote overall financial wellness by imparting knowledge and providing the tools you need to effectively manage your money
There are some basic lessons that you should teach your children to help them achieve financial independence, including:
- Budgeting — The most basic financial tool is creating a household budget, and understanding how to manage your income and expenses is an ideal place to start learning money management.
- Managing debt — With student loan debt on the rise and credit cards easier to obtain than ever, understanding the basics of debt and debt management is a necessary financial survival skill.
- Creating an emergency fund — Knowing how to save is another basic skill. At the very least, everyone should know how to create a fund to cover basic emergencies.
- Retirement planning — In addition to dealing with immediate financial problems, you also need to know how to plan for the future, especially retirement.
The goal of teaching financial literacy is to start kids on the road to financial independence, and the right lessons can yield some substantial returns.
The Value of Financial Literacy
Those who are taught financial literacy at an early age are better prepared to run their financial lives when they graduate high school. This includes understanding how to approach college tuition and student loan debt, and how to step into the workforce with confidence in how you manage your paycheck. There are some tangible benefits of having a solid financial education:
- Higher income — A recent survey of 1,500 adults shows that only 18% of those who talked to their parents about money growing up have an income below $50,000 a year, but that number jumps to 31% for those who didn’t talk about personal finance at home.
- Wealth accumulation — Of students who learn about finance in school, 51% plan to pay for their own college education, and 87% say they feel confident about investing. Clearly, financial literacy is a step toward better savings strategies and accumulating wealth.
- Increased credit score — Understanding lending and credit provides the tools needed to maintain a healthy credit score, which is important for employment and other aspects of adult life, as well as borrowing.
- A positive relationship with money — Knowledge is power, and having a solid financial education means that students don’t have to be among the 25% of people who continually worry about money.
Teaching Financial Literacy
So how do you go about teaching your children to be financially savvy? Start by being open and frank about money and talk to them about how to use money to achieve their life goals. You can also start by introducing them to the basic banking tools you use every day:
- Savings account — Do you remember when you were young and opened your first savings account? If you’re old enough, you probably received a pocket-sized savings passbook. These days, savings accounts are computerized, which means it’s easier to make deposits and monitor growth. A savings account is the best place to start to learn about finance.
- Checking account — Peer-to-peer payment services like Venmo, Zelle, and PayPal are becoming more popular, especially among students who use them to reimburse friends for concert tickets or pizza, but those services still need to be tied to a checking account. A checking account should be the foundation for any personal budgeting strategy.
- Debit card — With checking comes a debit card, which becomes an easy way to access your money. Even if you use Apple Pay or another electronic payment system, it is usually linked to a debit or credit card. Some debit cards, like the iQ Easy Saver card, can also help you build more savings.
- Credit card — Getting a credit card is the easiest way to start learning about rotating credit, and it helps establish personal credit. Student credit cards are often available with lower spending limits so that you can’t overspend.
You should also talk to your children about establishing financial goals. Help them set up a personal budget that balances income and expenses and allocates money for savings. Help them establish a savings plan for something they want, such as a trip or a car, to give them a goal and show them how to save for it. You can also start planning ahead for college savings and setting up a budget for living away from home. Also talk to them about their credit score, when it makes sense to borrow money (such as for a car or student loans), and how their credit score affects their financial well-being.
These lessons in personal money management will last a lifetime, which is why it’s important to start teaching financial literacy early. Look for opportunities to present lessons on finance and talk to your kids about how to manage money. If you need help, there are financial literacy resources available. iQ Credit Union offers education programs to help teach financial literacy and get your kids started on the road to financial independence. Remember, the professionals at iQ Credit Union are always here to help.