April is Financial Literacy Month, a time to focus on understanding money matters such as saving, investing, budgeting, income, interest rates, and spending habits. Despite being the wealthiest nation globally, the United States ranks 14th in financial literacy. Only 57% of American adults possess financial literacy, costing them an average of $1,819 annually due to mistakes resulting from their lack of financial knowledge. One contributing factor to this low level of financial literacy among adults is the limited requirement for personal finance instruction in schools, with only 20 states mandating some form of financial education.
To address this educational gap, parents can take steps to teach their children about money, especially in affluent communities where the prevalence of wealth can pose unique challenges. Here are some key points to discuss with children in affluent communities:
Understanding the Concept of “Enough”
In affluent communities, where material possessions are abundant, it’s essential to teach children that wealth is not solely defined by possessions. My daughter is very sensitive to what her peers are wearing, driving, doing. She’s always asking why she can’t buy this or that or why we don’t buy a new car. Emphasize the importance of financial security through saving and investing, rather than conspicuous consumption. Teaching children to avoid comparing themselves to others fosters contentment and increases happiness, as Theodore Roosevelt aptly noted, “Comparison is the thief of joy.”
Budgeting Skills
Teaching children how to budget by tracking income and expenses is crucial for financial independence and achieving life goals like homeownership or retirement. We recently had to have a conversation with our teenage son because he said he was the only one of his friends who brings his lunch from home. He was doing this to save his lunch money to use for gas in his car. To get a better handle on a reasonable amount to give him in gas and lunch money, we asked him to download his transaction history from his debit account and categorize and summarize his spending. We then used this data to have a conversation about a reasonable amount to give him each week to enable him to eat out a couple of days and still have money for gas. While many of his friends’ parents give them money to eat out every day, we don’t want him to develop habits that will be hard to sustain when he is on his own.
Getting a Job
In order to be able to do some of the fun things their friends are doing, and because we’re not willing to pay for it all, we’re encouraging our kids to get a job. Encouraging children to seek employment helps them learn valuable life skills such as punctuality, responsibility, customer service, and financial management. It will also provide them with a steady source of income, so they have money to eat out, go to the movies and other fun things their friends are doing.
Raising financially literate children is a challenging but rewarding endeavor, particularly in affluent communities. Teaching children to be content with what they have, to budget effectively, and to earn their income fosters financial independence and sets them on a path toward long-term financial well-being.