Did you know that financially literate people are likely to have twice as much wealth1 as those who don’t understand how to budget or save?
While 17 states now require financial literacy be taught in schools, many children fall through the cracks, which means it’s up to families to make sure the next generation has a solid financial education foundation.
Does the next generation know how to manage their cashflow? Or explain how compound interest works? Or understand how to handle a trust fund you’ve set up?
Here are four ways you can help the next generation be more successful with a solid foundation in financial literacy.
1. Understand today’s pressures
It is important to understand that younger people are maturing and growing up in a different society than previous generations did. While today’s youth may not be “walking 10 miles to school, uphill both ways,” they are still dealing with large amounts of pressure and divisive social constructs that overexaggerate the importance of materialistic values. With wealthy celebrities and influencers flaunting high-end lifestyles online, younger generations may feel an increasing need to “keep up with the Joneses.” Seeking to understand what influences the next generation’s everyday life, families can better help children see beyond the superficial and understand the importance of budgeting for the long-term.
2. Teach the importance of lending and credit scores
When thinking about lending and debt, many people get nervous, and that is understandable. Who likes to think about the thousands of dollars that is owed to creditors? No one. But the truth is that lending and borrowing creates opportunity. Without being able to go into debt, American homeownership rates would probably plummet and far less people would have access to higher education. The ability to borrow relies largely on an individual’s credit history and credit score (or that of their parents). Teach your children at a young age about the importance of the punctuality of their debt payments and why using a credit card for manageable spending can pay off in the long run by creating credit history.
3. Teach them about “opportunity costs”
Almost everyone can easily understand the initial trade-off when they purchase something. You pay a certain price with money that you have earned or been gifted, and in return you receive the good or service. What may fly under the radar is the “opportunity cost” of that purchase. This would be the loss of a potential gain from an alternative use of their money. Did they buy a new pair of shoes now when they could have been saving for a big family trip later in the year? Could they have invested the dollars? Helping them realize the opportunity they missed out on will likely instill good financial practices for adulthood — impacting both their current and future financial situations.
4. Teach them to save for retirement
More companies are focusing on benefit packages to attract strong up-and-coming talent and this is a key element that the next generation can watch out for when selecting their career path. Understanding how to save for retirement — especially now that employers have shifted the responsibility of retirement savings onto employees — can be the key to the next generation’s future. Choosing to save a little now can pay off big in the long run with a good retirement savings strategy.
Consistent and early investing can have a strong impact for individuals who are growing their wealth. Choosing to start at an early age, younger generations can essentially plant a seed and allow it plenty of time to grow so they can retire and live their dreams.
Ready to engage your family in your financial plan? Connect with an advisor to plan with purpose.