As students prepare for a new academic year, there’s an important element to ensure that financial literacy is added to their curriculum of life. The importance of this skill for children and young adults alike cannot be exaggerated. Just as children are taught to read and write, learning about money management is equally vital for a well-rounded education.
In the UK, where university students are projected to graduate with an average debt of £45,000 , and where the nuances of credit scores, mortgages, and investments are rarely part of a standard curriculum, financial education is a pressing concern. For financial advisers, this time of year presents a unique opportunity to engage with clients about instilling good money habits in their children, from those heading to primary school to those stepping onto university campuses.
Why is Financial Literacy Important?
Financial literacy is an essential skill for young adults for many reasons. One fundamental factor that cannot be overlooked is debt management. While student loans may be the first form of debt faced by young adults, they are not the only financial obligation they will encounter. Credit card debt, overdrafts, and personal loans must be understood, making interest rates, repayment options, and the long-term impact of debt more important than ever.
In addition to managing debt, understanding how to budget for daily life, negotiate salaries, and save for future objectives lays the groundwork for informed decision-making. Acquiring these financial skills from a young age can reduce stress and provide greater independence and self-efficacy. It helps young people face the challenges of adulthood with a sense of preparedness.
Long-term planning is also important to instil, such as understanding the benefits of early investments and the power of compound interest, which sets young adults on a path towards a more secure financial future. These early lessons in financial planning can be invaluable in achieving future milestones, like buying a home or starting a family. Moreover, the uncertainties of life highlight the need for financial resilience. The ability to allocate resources wisely, maintain an emergency fund, and navigate unexpected financial challenges is not just a good habit, but a life skill that can mitigate crises.
An Age-Appropriate Approach
Educating children and young adults about finance is a gradual process, and the lessons should align with their evolving understanding and life circumstances. A segmented, age-appropriate strategy can make financial literacy more relatable and less intimidating. Here’s how parents can approach financial education at different life stages:
Primary School: Laying the Foundation
The Concept of Money: Start by teaching your children what money is, where it comes from, and how it’s earned. Simple activities like counting coins and notes can be both educational and fun.
Saving and Budgeting: At this stage, the concept of saving money in a piggy bank can be introduced. You can teach your children how to allocate pocket money for different purposes—savings, expenses, and perhaps even charitable giving. This approach instils a basic understanding of budgeting.
Needs vs. Wants: This is an excellent time to teach your children the difference between needs and wants, helping them make sensible choices when spending.
Earning through Chores: Consider giving your children small chores in exchange for pocket money. This teaches the value of work and the importance of earning.
Secondary School: Building on the Basics
Interest Rates and Banking: As young adults grow, their finances become more complicated. This is a good time to introduce the concept of banking, explaining how savings accounts and interest rates work.
Credit Cards and Loans: With university around the corner for many, understanding credit is crucial. Teach your children about responsible credit card use, the importance of paying off balances, and the implications of loans.
Basic Investing: Begin discussing more complex financial topics, such as the stock market and other investment vehicles. This can stimulate interest in long-term financial planning. Focus on the importance of starting early.
Credit Score: Introduce the concept and importance of maintaining a good credit score, explaining that this three-digit number can influence their ability to buy a home, take out a loan, or even land a job in the future.
University: A Focus on Financial Independence
Investment and Taxes: As your children earn more independence and possibly take part-time jobs, students should understand the basics of taxation and how to maximise their income through sensible investing.
Retirement Planning: It’s never too early to think about retirement. Introduce pension schemes, the power of compound interest, and the importance of early and consistent contributions.
Emergency Funds: The transition to adulthood often comes with unexpected expenses. Teach them the importance of setting aside money for emergencies.
Financial Products: This is an ideal time to discuss different financial products available, such as ISAs, bonds, and mutual funds, equipping them with tools for diverse investment strategies.
HM REVENUE AND CUSTOMS PRACTISE AND THE LAW RELATING TO TAXATION ARE COMPLEX AND SUBJECT TO INDIVIDUAL CIRCUMSTANCES AND CHANGES WHICH CANNOT BE FORESEEN.
AN ISA IS A MEDIUM TO LONG TERM INVESTMENT, WHICH AIMS TO INCREASE THE VALUE OF THE MONEY YOU INVEST FOR GROWTH OR INCOME OR BOTH. THE VALUE OF YOUR INVESTMENTS AND ANY INCOME FROM THEM CAN FALL AS WELL AS RISE. YOU MAY NOT GET BACK THE AMOUNT YOU INVESTED.
While we celebrate the return to classrooms, let us also celebrate and promote the importance of financial literacy. It’s not just numbers, it’s about equipping children and young adults with the ability to make informed decisions that will shape their lives for years to come. As we prepare uniforms, new textbooks and stationery this September, we should also ensure that our children also open a new chapter on financial literacy.
 UK Parliament – Research Briefing – Student loan statistics – July 2023