UNDERSTANDING FINANCIAL LITERACY IN 4 STEPS

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Teaching kids financial literacy seems to be a lost art. When people like our parents were growing up, they were taught the value of a dollar and the value of hard work. Moreover they were also taught how to save money. Many of today's youth have no idea what goes into the value of a dollar and what can affect its value - such as interest rates, real GDP, fiscal policy, etc.

Being financially literate starts with knowing how to earn a dollar and the value behind the hard work that must take place to earn that dollar. Being able to earn money affords you the opportunity to become independent financially. A big part of being independent financially means you get to have a say when it comes to spending your money - after all it is your money that you earned. Now, as a kid your parents may still have some say on what you buy, but now it's not your parents money you're spending, it's your own.

1. A great way to start earning that money comes in the form of an allowance. usually in exchange for doing daily or weekly chores your parents will pay you for doing those chores. Kids need to understand that this exchange of service and money is an agreement or "quid pro quo" (something for something). An allowance teaches kids that money has to be earned and that it is not just given to them. The virtue of earning a dollar is something that they will carry for the rest of their life and even more so when they're ready to enter the workforce.

2. SAVE! SAVE! SAVE!
No matter what age you start earning money, One of the most important aspects of saving is learning how to pay yourself first. Paying yourself first means coming up with an amount from your earnings (allowance or paycheck) that isn't needed for buying necessities such as food, gas for your car, etc and setting it aside in a savings account. this is done before a penny is even spent. doing things like spending what you want first and then trying to save what's left will leave you with a dismal amount of money in your savings - if any at all.

Another important aspect of saving involves making the money you've saved work for you. In order to do this you have to save your money in an account that earns a decent amount of interest. Even if it's a small percentage of interest such as 1% or 1.5%. 1% interest is better than 0% interest when it comes to saving money. In it's simplest form, interest is nothing more than a payment to you for keeping your money within that financial institution. When I explained savings to my son I wrapped it up with this - "today's savings means an easier tomorrow". There is nothing worse than needing money in an urgent manner and not having any to fall back on.

3. Spending - Need vs Want.
Teaching kids the aspect of need versus want is a big step in teaching them how to be financially literate and financially responsible. Earning money comes with responsibilities such as paying bills, paying someone back, buying necessities such as food. as stated before, earning money comes with responsibility, however, what you do with your money can come with consequences. if you spend your money foolishly how do you plan on getting gas in your car? If you have a job - no gas means no way to get to work. no way to get to work pretty soon means you have no job. having no job means you have no more money coming in - these are consequences that only get more real the older you get.
A helpful trick when it comes to how to spend the money you've earned is asking yourself one question - "Is this something I need or something I want?". Growing up this helped me immensely. More times than not you will find that most of the things you go to spend your money on are things that you want and not things that you truly need. Things that qualify as "needs" are things such as gas for your car, paying for car insurance, food, and clothing. can you drive your car without gas? No, so it's something you need. does your car have to have car insurance in order to be legal? Yes, so again it's something you need.
Now, it is absolutely okay to splurge a little bit at times when you can afford to do so to reward yourself for working hard and responsibly saving your money. Though it goes without saying - if you have $500 in savings you should not be buying a $500 gaming console. Why? Because it depletes your savings account and now leaves you vulnerable if you need money in an emergent situation. Let's say you spent that $500 for the gaming console and on the way home you got a flat tire? How would you pay for a new tire or pay to get it fixed? You can quickly see how the excitement of buying a gaming console has now turned into a very stressful situation for you.
When it comes to spending money saved on things that you want you should spend no more than 30%. So if you have $500 in your savings then $150 of it can be fun money. Think big picture here though because this is where saving can really add up - so let's say you've saved $2,000? You can see how the amount available to spend increased by quite a bit when using the 30% rule. Now you can afford to spend up to $600. Saving your money really does add up.
4. Invest your money early in life. investing involves opening an account with a brokerage firm such as MooMoo and depositing money into your account. the difference between a savings account and an investment account is that you get the pick where who your money goes to - in the form of buying shares in various companies in the stock market.
In it's simplest form - buying even just one share of a company, let's say Google, means you now own a small piece of that company. The money that you used to buy that share now becomes money that the company can use to make products, make investments, expand or grow bigger, etc. when you purchase a share or shares of a company, you buy it for a certain price. the prices change consistently all day while the market is open. however, now that you own a small piece of the company, that company now has an obligation to make their company more valuable in order to make the price of their shares go up. For example, let's say you buy 10 shares of DoorDash for $70. this means you took $700 and bought 10 shares. now, let's fast forward to 2 years from now and you check on your doordash shares and see that now they're worth $150 a share. the increase in price from $70 to $150 is an $80 increase per share. so for every share that you own of DoorDash there was an $80 increase. remember you own 10 shares so and $80 increase in the price per share times your 10 shares means you've made $800. initially you spent $700 to buy the 10 shares of DoorDash. simply put, if you wanted to sell your shares, this means that someone would have to pay you $150 for each share that you own. Now instead of only having $700 in your account you now have $1,500 in your account because you own 10 shares that are now worth $150. See how your money made you money? the stock market can also be very risky and you can lose money as well, but that's why you invest in bigger and more reputable companies that are well known such as Apple or Google. you should always infest your money and only buy shares of companies that have a history of becoming more valuable as a company in terms of their stock price going up.
To finish - money is the number one cause of stress in the world. it's a proven fact. becoming financially literate and knowing how to make smart decisions with your money will not only allow you to enjoy more things materially in life, nicer clothes, nicer car, nicer home, but more importantly it will allow you to be more free in life which gives you the opportunity to just enjoy living life without the stress of money weighing you down.