If you’ve clicked onto this article, chances are you know that financial literacy for teens is important.
The real question is: where do you start?
More aptly: how do you start?
We know what you’re thinking: of course real pocket money is the way to go when teaching financial concepts. It’s tangible; it’s real; your child can hold their pocket money in their hand, and if they spend it, they’re losing real cash.
But what if we told you that virtual currency works? In fact, we’re going to go one step further and tell you why it works, and how you can start the “money talk” with your child, hassle-free.
Why is Work Important?
Before kids can learn about money, they need to learn and internalize one important concept: why work is important. Money matters a great deal and plays a role in many aspects of our lives. As Steve Jobs reminds us “work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work.” So when reviewing key financial concepts with your kids we start from the foundation of work. Without work, and by extension effort, other financial concepts seemingly fall away.
What Should We Tell The Children?
We advise that you speak with your child about your work and what you do. Start here:
- Where do you earn money, how do you earn money and why?
- In what ways does does your work support or influence your lifestyle?
- What do you find most challenging about work?
If you are like most people, then you feel you work too much and don’t earn enough money relative to your contributions. Been there, done that, right? Many millennials feel this way too. Often entry level positions are, by definition, at the bottom of the pay and intellectual ladder because more skilled individuals are doing higher impact work. But every opportunity to work is an opportunity to learn. And through learning new concepts, financial literacy skills are developed. After discussing work we advise you teach them the next most important concept in financial education: saving.
Emerging Digital Trends
At this juncture, we need to ask what are we actually saving. We believe that only real money can be saved. By this we mean money (digital or otherwise) that is linked to real money. We don’t mean points or credits. While virtual points are a tool to explain certain concepts, it is not a substitute for the real thing. According to the Orange Union there’s a digital trend, “in today’s society [where] very few transactions are made with actual paper money. Instead, many are opting for card or online based payment methods. Not seeing money exchanged for purchases makes it harder for kids to get their heads around what things cost and how money works. They might see this ‘invisible money’ as an abstract and unlimited resource rather than real money coming in and out of their own bank account.” It’s important to note that money spent online or in the physical world is still money. It must be earned, saved, and possessed in order to be utilized.
Orange Union states that “in 2014, the US Parents, Kids and Money Survey suggested 73% of parents agree that because transactions are often digital, kids think of currency differently than they did when they were growing up. Data has emerged suggesting that 33% of parents believe digital transactions make it harder for their child to understand the value of money and roughly one in three (35%) children simply don’t know how digital purchases are paid for. These types of statistics are alarming and highlight the influence digital technologies are having on how children understand money.”
Think about that for a moment.
At a time when financial education is becoming increasingly important, our physical connection to money is becoming weaker. Kids are buying more stuff online and in digital stores but don’t know how these transactions work or how money underpins them. The costs are becoming abstract, and that is a problem. When consumers are divorced from the real financial cost of a transaction, they are likely to spend and consume more, and mindlessly.
Orange Union provides a prudent and thoughtful course of action for families that is worth quoting at length. “In an age where we can slot a plastic card into a ‘hole in the wall’ and obtain physical currency, or where you can ‘tap and go’ to pay, it is easy to see how our children might not fully understand where the money used to pay for things comes from. The best remedy to this issue is to frequently explain to your kids the purchase path or the entire purchase process; from earning the money, to depositing the money into the bank and ultimately the final purchase and receipt. Using cash rather than electronic funds can also help to provide your child with a visual representation of how currency works. Once they understand physical money slowly introduce them to the idea of credit and credit purchases.” In other words, education is key. Constant reinforcement and a gradual march towards progress is important to help kids understand important financial concepts like, where money comes from (work) and how it’s spent.
In a time of credit cards and increasing ease of digital payments (movies, video games, and in-app purchases), internet banking and online shopping, children don’t often see people buying products with physical money like notes and coins. As noted by ASIC, “not seeing money exchanged for purchases makes it harder for kids to get their heads around what things cost. They might see this invisible money as an abstract and unlimited resource rather than real money coming in and out of their family’s bank accounts. Talking to kids about money often to help them make this invisible money real” is important. But when is a good time to speak about real pocket money, and what should be discussed?
The ASIC has some useful suggestions that are worth passing on.
They state that “teaching younger kids the value of money through real life situations and examples will help them understand where money comes from and how it is earned. Here are a few examples of how you could approach this with your kids. The ATM is a great place to start teaching kids about money. You could explain to your child that the ATM holds the money you have made by working hard and saving. It is not just a hole in the wall where money comes out. When you take money out of the ATM it is taken from your bank account and you’ll have less in your account to spend later. When buying items at the supermarket, you can explain to your kids how items are priced and that you can get cheaper or more expensive versions of the same product. This is also an opportunity to discuss how you can shop around for the best price. You could get them to compare prices for you and pick the cheapest one. If they want a particular brand then explain the price difference to them. If you receive bills in the mail or online, this can be an opportunity to explain that electricity or your internet connection costs money. You could explain that to pay a $150 power bill it took you so many days at work to earn the money. This will help create a connection between time spent at work and money, as well as the fact that electricity and the internet cost your family money. It might also make them think twice about leaving lights and appliances on. Involving your kids in discussions about your family budget is another way you can talk to your children about money. This helps give them the big picture about costs and spending. By explaining how much money your family has to spend every week and how this money is spent your kids will better understand the costs of family life and how much can be saved for other things.”
Oh, How Times Have Changed
When I was a kid I had a piggy bank. I remember the feeling of taking a coin and placing it into the jar. The coins had ridges that I could feel in my fingertips. When I let go, each coin made a clunk at the bottom. I remember how hard it was to open the piggy bank to extract the money, which I then handed to my parents. We would go to the bank and I would deposit my savings and get a paper receipt with my new, slightly larger, account balance. Seeing this figure go up, even by a few dollars, was a source of pride and became a personal competition. How could I deposit money to see the account balance grow the fastest? These memories are the memories of someone who handled money at a young age – and physically felt the connection to it. The digital world is different. In just a few clicks of a button, very large amounts of money can be spent. New items can be purchased and the feeling of trading real cash for real items has evaporated into digital bytes of zeros and ones. This makes life and purchasing goods easier, it some respects, but also comes with dangers. Removing the feeling of purchasing can be dangerous especially for those at the early stages of their financial education. Real money prevents this in a way that digital currency simply does not. It’s worth thinking about that the next time you can show a kid either digital or real money.
Got more to say? Disagree/agree with what I’ve said? Hit us up on Twitter @pennyboxapp with #financialliteracy and let’s talk about it – today’s virtual coffee’s on us 🙂