What is Financial Literacy?

Financial literacy is the ability to understand and effectively manage personal finances. It includes making informed decisions about how to earn, spend, save, invest, and borrow money. For children, financial literacy also encompasses understanding complex financial concepts such as interest, inflation, risk, and tools like credit cards, loans, and bank accounts. By equipping kids with this knowledge and skillset, parents can empower them to take control of their financial futures. These early lessons prepare children to make wise financial choices, avoid common pitfalls, and ultimately build a stable and prosperous future.

The Importance of Financial Literacy

Financial literacy plays a crucial role in shaping a child's financial future. According to Louise Hill, Co-founder and CEO of GoHenry, financial education can enhance early career earnings by up to 28%, and financially literate students are more likely to start their own businesses. This is because managing money effectively requires a wide range of skills, from basic math to budgeting and emotional control to avoid impulsive spending.

Research conducted by Cambridge University reveals that a child’s financial habits begin to form as early as age seven. Most young people start establishing the core behaviors that will influence their financial decisions for life. Sam Sims, Chief Executive of National Numeracy, further highlights the importance of feeling confident with numbers. From paying household bills to comparing prices in the supermarket, the ability to manage money is essential in navigating daily life.

Despite the inclusion of financial literacy in the secondary school curriculum since 2014, significant gaps remain. A study from the London Institute of Banking and Finance found that 82% of young people are eager to learn more about financial products such as mortgages, pensions, loans, and budgeting. This underscores the need for more comprehensive financial education for children at an early age.

Why Should Financial Literacy Be Taught in Schools?

In today’s increasingly complex financial landscape, it is crucial that children receive a solid financial education. Teaching financial literacy equips children with the tools they need to plan for the future, avoid debt, and manage their money effectively throughout life. As Stewart Perry, Director of the Centre for Financial Capability, puts it, children who receive financial education are better prepared to face economic challenges in adulthood.

In fact, students who report having received financial education at school are more likely to possess strong money management skills. However, only 4 in 10 children have access to financial education in school. This highlights a pressing need to integrate financial literacy into school curriculums across the globe.

Talking to Your Kids About Financial Literacy

Financial literacy doesn't need to be taught in formal, complicated conversations. In fact, the best approach is to weave financial discussions into everyday life. By making money a regular topic of conversation, children can begin to understand the real-world implications of financial decisions.

As Louise Hill from GoHenry notes, children start developing financial habits early, and providing them with an income—such as pocket money—gives them a chance to practice these skills. Simple conversations, such as explaining where money comes from when buying groceries or paying bills, allow children to build a concrete understanding of finances.

For teenagers, these conversations should evolve to cover more complex financial topics like credit scores, borrowing, loans, and investing. Tying these discussions to current events, what they are learning in school, and their future career goals can make financial literacy more relatable and meaningful.

What Are the Benefits of Being Financially Literate from a Young Age?

Research has shown that financial literacy can have a lasting impact on a child’s financial future. Kids who receive financial education early are often £70,000 richer by the time they retire. Teaching financial literacy from a young age provides several long-term benefits:

1. Financial Independence: Children who understand personal finance from an early age become less dependent on others and are more self-reliant when it comes to managing their money.
2. Improved Decision-Making: Financially literate children make better decisions about spending, saving, investing, and borrowing, leading to healthier financial outcomes.
3. Debt Management: Financial literacy helps children understand concepts like interest rates and loan terms, preventing them from accumulating excessive debt later in life.
4. Building Wealth: Knowledge of savings and investing allows children to make smart decisions that build wealth over time, such as saving for retirement.
5. Financial Security: Financially literate individuals are better equipped to handle unexpected financial challenges and are more capable of securing their futures.
6. Avoiding Financial Pitfalls: Financially aware individuals are less likely to fall prey to scams or predatory lending practices.
7. Teaching Responsibility and Accountability: Learning about money management early in life instills a sense of responsibility that shapes financial behaviors as children grow.
8. Empowerment: Financial literacy empowers children to take control of their financial future, allowing them to pursue their dreams and live independently.

What Are the Key Components of Financial Literacy?

At GoHenry, six key components are central to financial literacy: earn, spend, save, invest, borrow, and protect. Let’s take a closer look at each component.

• Spend: Teaching kids the value of money and how to prioritize needs versus wants is essential. Help them understand that wants are unlimited, but resources are not, which could lead to overspending if not managed wisely.

• Save: Saving is about planning for future goals, both short- and long-term. Teaching kids how to save—whether for a toy, a car, or college—helps them understand the importance of delayed gratification and financial stability.

• Earn: Earning money teaches children the value of hard work and helps them understand the correlation between effort and income. Kids should also learn how to manage income, read payslips, and understand taxes.

• Borrow: It’s important for kids to understand borrowing and the responsibilities that come with it. Introducing concepts like interest rates, loan terms, and credit scores early ensures they are well-prepared to manage debt in adulthood.

• Invest: Kids need to understand that investing money can potentially build wealth over time. Teach them about different types of investments—such as stocks and bonds—and how the stock market works.

• Protect: Financial literacy isn’t complete without teaching kids how to protect their money. With the rise of online scams, it’s vital to equip children with the skills to recognize and avoid financial fraud.

Activities to Help Children Build Financial Literacy

Building financial literacy is an ongoing process, and there are many activities that can help children practice these skills. One of the most effective ways is by providing children with pocket money. By giving them a set amount of money each week, they get the chance to practice budgeting, saving, and making decisions about spending.

Additionally, using educational apps like the GoHenry Money Missions can help children learn about money in a fun and engaging way. With interactive quizzes, videos, and challenges, these tools help kids develop financial knowledge while earning rewards.

Setting clear savings goals—whether for a new toy or a vacation—can also help children understand the importance of saving and staying focused on their financial objectives. Another great way to build financial literacy is by encouraging kids to participate in the digital economy, whether through online businesses or managing digital payments, which are increasingly common today.

Teaching Common Financial Mistakes

To help children develop strong financial habits, it's also essential to teach them about common financial mistakes. Spending more than you earn, not saving for the future, and failing to understand credit are just a few of the mistakes that can hinder financial growth. Helping children recognize these potential pitfalls will set them on a path to financial success.

Financial Literacy Resources

There are numerous resources available to teach kids about money, from interactive games and apps to age-appropriate books and videos. Resources like GoHenry provide tools that not only teach children how to manage their money but also make learning fun and rewarding.

Key Financial Terms to Teach Children

Introducing children to important financial terms is a great way to build a solid foundation. Concepts like budgeting, savings, interest, credit, debt, income, and inflation are essential for developing financial literacy. Teaching children these terms and their implications will help them make informed decisions about their money.

How GoHenry Can Help

GoHenry offers a prepaid debit card for children, which can be a game-changer in teaching financial literacy. From spending and saving to budgeting and managing money responsibly, GoHenry’s tools allow kids to experience real-life money management. With a GoHenry card, children can practice financial skills that will serve them for a lifetime, making them financially confident and capable.

Incorporating financial literacy into a child’s education—whether through discussions at home, hands-on activities, or digital resources like GoHenry—will empower them to make smart financial choices and set them up for a successful future. With financial skills in hand, kids can learn how to manage their money, avoid common financial pitfalls, and take control of their financial futures. At Flareschool, we understand the importance of these lessons and are committed to supporting families in nurturing financially savvy children who are prepared for the challenges of tomorrow.