3 Reasons Why Every Kid Should Be Financially Literate

3 Reasons Why Every Kid Should Be Financially Literate_5fbeb34a59f6d.jpeg
Better Conversation David Johns Financial Literacy Norman West The White House Initiative on Educational Excellence for African Americans

3 Reasons Why Every Kid Should Be Financially Literate

3 Reasons Why Every Kid Should Be Financially Literate

Discussing finances can be uncomfortable, especially in households that are in debt or struggling to make ends meet. What could prove even more detrimental, however, is avoiding critical conversations focusing on the essential elements of personal finance, especially those designed to equip children and young adults with the skills needed to manage money and ensure financial stability.

We encourage every caring and concerned adult to have critical conversations about finances with youth. At a critically important time in our history when countries are claiming insolvency and recessions are impacting global economies, one of the most important steps that can be taken is to educate children and youth on financial literacy starting at an early age.

By instilling principles that will help children and youth avoid the type of fiscal foundering, bad money-making decisions, that can cumulatively weaken communities and cripple society, we can reap the benefits of a generation of pecuniary powerhouses.

Still not convinced of the benefits of financial literacy for students? Here are three compelling reasons to teach kids financial literacy early:

  1. Financially literate students make better choices. Similar to the subprime mortgage crisis that began in 2007 and served as the primary contributor to the Great Recession, many students are borrowing more for their education than they may be able to pay back. This is due in large part to a lack of financial literacy training for high school and college students, who are unaware of the billions of dollars in grants and scholarships that are available for their educational costs each year.

    Financially literate students make better choices about which institute of higher education to attend, what to study, how to pay for college and how to manage student loan debt after graduation.

    President Obama has taken drastic action to alleviate the student loan burden, including capping monthly loan repayment to 10 percent of a student’s discretionary income and forgiving undergraduate loans after 20 years of payments have been made. Even with these measures in place, the best financial aid is that which students don’t have to pay back. Access to personal finance workshops could teach students how to research free money for college rather than defaulting to student loans to pay for school.

  2. Two words: compound interest. Albert Einstein once said “Compound interest is the eighth wonder of the world,” going on to say that, “He who understands it earns it; he who doesn’t pays it.” Your money can work for you or against you. The sooner youth are taught this lesson, the better off (and richer) they’ll be.

    The most powerful element of compound interest is that the money you save or invest builds on itself over time, with the interest that you gain also earning interest. Kids who start early will have a whole lot more and will have had to save a whole lot less than their peers who wait until later to start putting money away.

    Here’s an example. Let’s say we have two young investors: Malik and Latasha. Both save $2,000 per year and earn a 6 percent return compounded monthly until age 65. Malik starts saving at age 19, while Latasha begins at age 27. At age 65, Malik will have $537,163 in his account and Latasha will have $319,687. Malik ends up with over $200,000 more than Latasha’s total, even though he only invested $16,000 more! That is compound interest at work.

    It’s important to note that these conversations cannot begin too early. Joshua and Jeremiah West wrote “Champions of Change,” a book to teach other children about the importance of spending, saving, and sharing—essential principles for a financially independent life. The book and work of the West brothers is evidence of the fact that children can learn about important financial concepts early when properly engaged and supported.

  3. Money talk is not an “equal opportunity” lesson. A Jump$tart Coalition survey showed that the vast majority of youth who were considered “financially literate” were white males from well-educated families. However, every child will eventually grow up and have to make many of the same major money decisions that their parents have made, including buying a home, purchasing cars and saving for retirement.

    Financially undereducated young people from other demographics will be at a severe disadvantage compared to their white male counterparts when faced with these choices. Educating students from all socioeconomic backgrounds about money will play a pivotal role in ensuring that no youth are left behind when it comes to personal finance.

These are only three of the many reasons why we must be intentional in teaching financial literacy to children and youth, especially children and youth from homes and communities that are most likely to miss opportunities to learn and practice the principles that support financial independence and success more generally.

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