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ISIS: SUMMER 2014

President Obama has focused the second largest economy on the importance of financial education for children by launching a month-long campaign on Children and Finance in April 2014. In this article we look at why this is an important topic and offer some ideas on how you can get the conversation started with your children.

Is financial literacy included in school education?Across the globe, financial literacy is seen as a non-curricular subject for schools and there is a mounting understanding of the impact of the lack of financial literacy and its effect. Therefore, there is a growing movement for it to be adopted in schools in the same way as other disciplines like home economics. However, the current challenge is that there are no certifications in academia for instruction in this topic. Therefore, it is left to parents to give guidance to their children on how to become savvy investors.

What is financial literacy?The definition of financial literary is: “the set of skills and knowledge that allow you to understand: the financial principles you need to know to make informed financial decisions; and the financial products that impact your financial well-being.”

FINANCIAL LITERACY FOR THE FAMILY AND YOUR CHILDBY REBECCA ELLIS – WEALTH ANGELS

When do children start understanding the power of money?A study from Cambridge University earlier this year confirmed that kids’ money habits are formed by age seven.

Most studies are based in the US, and they substantiate that there is a low level of knowledge about financial topics, from comprehension of inflation to the tools of saving, such as compound interest. This just confirms that it is necessary for finance to be taught at a younger level.

Reports from the OECD also corroborate that in other developed countries, financial literacy is also poor. Countries included in the reports include Australia, France, Germany, Italy, the Netherlands, New Zealand, Romania, Russia, Sweden and Switzerland, according to a recent international survey.

Who best to teach children?As seen from this survey, children worry about money and the people they listen to is their PARENTS!

Children seek guidance from their parents. As the key influencers, parents need to think about what they are teaching children. If parents feel uncomfortable due to social norms with the subject of money, there are professional advisors who can help you fill the gap.

What are the key concepts?Parents should consider these broad categories

• Understand the key financial products Examples: including bank accounts, mortgages, retirement savings plans and basic investments like stocks, bonds and mutual funds.

• Understand basic financial concepts Examples: compound interest, investment return, risk, diversification

• Discuss money and financial issues Even if you don’t really like to talk about them

• Make good financial choices about saving, spending and managing debt throughout your life Examples: when getting an education, starting a job, buying a house, starting a family, getting ready to retire and living out your senior years

• Respond competently to changes that affect your everyday financial well-being Examples: the general economy such as the recent collapse of financial markets, rising unemployment and the threat of rapid inflation.

How to teach financial literacy – the basicsBelow we offer some practical examples and ideas of how to bring the subject to life for the age group of 7-11 years old. We also suggest some resources, which would be useful.

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Money CreationWhen you start explaining money, you may want to explain how you finance the family household. You might say, for example, “I work at the dentist’s office. I get paid for each hour I work, and I work about 40 hours every week. At the end of each week, I get a paycheck. Our family uses the money to buy the things we need and some of the things we want. We also save some money each week so we can use it later.”

This can be reinforced with visits to the workplace. In Switzerland, most schools operate a visiting parents’ workplace program. When the visit arises you should use this opportunity to explain what your job is and how you are paid (specific details of money are not necessary).

Money ManagementSpend, save and share! Even with younger kids the concept of budgeting and considering future purchases can identify good foundations for money management when they progress to leaving home. One useful website, Three Jars, suggests a great yet simple concept. Three jars - labeled “Spend”, “Save” and “Share”.

This philosophy enables you to explain needs and wants (food and luxury), delayed gratification (waiting to buy a toy or object of your desire) and helps children work through

the accounting of what it requires to buy the big purchases. In this concept the “Save” pot develops the concept of banks; research has found taking your children to the bank at least three times a year can help cement the concept of how banks play a role in money management.

Interest – Saving interest “compounding” and paying interest “Credit”When you use your credit card you can introduce the subject of interest and explain the concept of having to pay more unless you pay the amount at the due date. You can also use the jar saving concept to explain that the bank receiving the jar will give a financial “thank-you” for holding the money and this is known as interest. You can also show your children that the bank gives you a bigger thank you the longer it holds the jar. Compound interest is when you earn interest on both the money you save and the interest you earn.

Creative Money ManagementExplain that sometimes adults (and even teenagers) use their special talents to set up new companies. When people decide to do this they are called an entrepreneur. They are their own boss and have to make lots of important decisions, and they may not earn the same amount of money each week. There are lots of different types of entrepreneurs, from people

who open up a candy store to those who to those who thought up Facebook. These people get rewarded if the idea is popular and this also enables you to discuss the risk of undertaking something for profit. It’s important if your children have ideas to develop the concept of the jars and how they can consider allocating their money differently to support their ideas.

In Summary: Improving your KnowledgeThe sooner children practically use these skills, the more prepared they will be for their future. While it may seem simple, banking and finance has evolved and the picture has become quite complex. We are an independent and unbiased firm offering support to help you to grow and enrich. If you wish to discuss the topic of financial management for your family with us, please visit us at www.wealthangels.ch

Resources for teaching aidswww.kinder-cash.com - Swiss & OECD based

www.threejars.com - US Based organisation