Financial literacy for kids: Why is it important?

Financial literacy is more than just an academic subject—it’s a life skill that empowers individuals to make informed and responsible financial decisions. For children, understanding financial concepts and practicing money management early in life builds a foundation for financial independence, security, and success. This article explores the importance of financial education for kids, delves into key components of financial literacy, and offers practical activities to help children develop essential money management skills.

What is Financial Literacy?

Financial literacy is the ability to make financially responsible and informed decisions in everyday life. It encompasses a range of topics, including earning, spending, saving, investing, and borrowing. A financially literate individual understands concepts like interest, inflation, and risk while being proficient in using financial tools such as bank accounts, credit cards, and loans.

Equipping children with this financial knowledge helps them develop the skills and behaviors needed to control their financial futures, make wise financial decisions, and avoid common financial pitfalls.

Why is Financial Education for Kids Crucial?

In today’s fast-paced and complex financial world, children must develop the skills and confidence to handle money effectively. Financial literacy is no longer optional; it is a necessity. According to a Cambridge University study, financial habits start forming as early as age seven, and these behaviors significantly influence the financial decisions children will make throughout their lives.

The Long-Term Benefits of Financial Literacy

• Higher Earnings Potential: Research by CBI Economics and GoHenry indicates that financial literacy can increase early-career earnings by up to 28%.
• Business Acumen: Students with strong financial knowledge are more likely to explore entrepreneurial ventures.
• Confidence with Numbers: Sam Sims, Chief Executive of National Numeracy, emphasizes that financial literacy enhances everyday decision-making, such as comparing prices or planning for future expenses.

Despite its importance, a study by the London Institute of Banking and Finance found that 82% of young people in the UK want to learn more about money management and financial products, highlighting the gap in financial education.

Why Should Financial Literacy Be Taught in Schools?

Schools provide an ideal platform to teach financial literacy, equipping children with the skills needed to thrive in adulthood. Yet, only four in ten children report receiving financial education in school, despite it being part of the National Curriculum since 2014.

The Benefits of Financial Education in Schools

1. Planning for the Future: Children learn to set financial goals, budget, and plan for significant life milestones.
2. Avoiding Debt: Early education helps young people understand loans, credit, and debt management, reducing the likelihood of financial missteps later in life.
3. Boosting Resilience: Financial literacy enhances money confidence and resilience, helping young people navigate economic difficulties.

Stewart Perry, Director of the Centre for Financial Capability, underscores the urgency of implementing financial education programs in schools to combat the national financial literacy crisis.

The Key Components of Financial Literacy

At its core, financial literacy comprises six key components: earn, spend, save, invest, borrow, and protect. Each element provides a critical building block for developing money management skills.

1. Spend

Teaching kids about spending responsibly begins with distinguishing between needs and wants. This understanding forms the basis for prioritizing purchases and avoiding impulsive spending. Parenting expert Tanith Carey explains that learning to differentiate between "needs" and "wants" is crucial for future financial decisions.

2. Save

Saving goes beyond putting money aside—it’s about setting goals and delaying gratification to achieve them. Helping children open a savings account or set short- and long-term savings goals builds discipline and financial stability.

Simonne Gnessen, a financial coach, highlights the importance of framing savings as a "future gift" to oneself, instilling a sense of purpose in saving habits.

3. Earn

Earning money, whether through chores, part-time jobs, or entrepreneurial ventures, helps children understand the value of hard work and financial independence. Teaching kids about payslips and deductions such as taxes introduces them to the realities of earning income.

4. Borrow

Understanding borrowing is crucial for avoiding debt traps in adulthood. Teach children about loans, interest, and credit scores to help them make informed decisions about borrowing and repayment.

5. Invest

Investing introduces children to the idea of growing their money over time. Explain basic concepts like stocks, bonds, and compound interest, and consider using simple tools like savings bonds or junior ISAs to provide real-life examples.

6. Protect

Financial literacy also involves safeguarding one’s finances. Teach kids about digital security, avoiding scams, and the importance of protecting personal information to ensure financial safety in an increasingly digital world.

Talking to Your Kids About Financial Literacy

Discussing money doesn’t have to be daunting. Making conversations about finances a regular part of daily life can help normalize the topic for children.

• For Young Children: Introduce the concept of money through everyday activities, such as grocery shopping or paying bills. Discuss where money comes from and how it is spent.
• For Teenagers: Dive into more complex topics like borrowing, credit scores, and the stock market. Connect these discussions to their interests, career goals, or current events to keep them engaged.

Louise Hill, Co-founder and CEO of GoHenry, notes that providing children with hands-on experience, such as giving them an allowance, allows them to practice critical skills like budgeting and delayed gratification.

The Benefits of Financial Literacy from a Young Age

Financial literacy equips children with the tools to navigate life’s financial challenges confidently. Here’s how it helps:

• Financial Independence: Kids learn to manage their finances without relying on others.
• Better Decision-Making: Informed choices about spending, saving, and borrowing lead to better financial outcomes.
• Debt Avoidance: A solid understanding of credit and loans reduces the likelihood of falling into debt.
• Wealth Building: Smart investment strategies enable long-term financial growth.
• Financial Security: Preparedness for unexpected challenges creates peace of mind.

Economic studies show that kids who receive financial education early can be £70,000 richer in retirement—a compelling case for prioritizing financial education.

Activities to Help Kids Build Financial Literacy

Learning about money can be fun and engaging. Here are practical activities to reinforce financial literacy:

1. Budgeting Games: Use apps or board games that simulate real-life financial scenarios.
2. Savings Challenges: Encourage children to set and achieve savings goals, such as saving for a toy or a special outing.
3. Mock Investments: Introduce kids to the stock market by tracking the performance of a few companies.
4. Money Journals: Have children keep a journal of their spending and saving habits.
5. Entrepreneurial Projects: Encourage kids to start small businesses, like a lemonade stand, to learn about earning and managing money.

Conclusion

Financial literacy is a critical skill that empowers children to take control of their financial futures. By teaching them the six components of financial literacy—earn, spend, save, invest, borrow, and protect—parents and educators can lay the groundwork for lifelong financial stability.

With financial education for kids becoming increasingly important, integrating lessons about money into everyday conversations and school curriculums is essential. Activities and real-life examples make learning about money engaging and practical, ensuring that children grow into financially responsible adults.

By investing in their financial knowledge early, we equip children with the confidence and skills they need to navigate a complex financial world successfully.