More than 1.5 million people in the US file for bankruptcy every year. Excessive or poor use of credit is one of the leading causes of these cases.
Even Singaporeans are not immune to insolvency. The country has one of the most stable economies, yet their people and companies still file for bankruptcy. In 2021 alone, they recorded 3,106 insolvency applications, 2,045 of which were discharged.
The number of bankruptcy cases in Singapore is far less than that in the United States. Yet, what’s clear is even in the most robust economies, insolvency can happen. This is precisely why every individual should be financially literate. It helps you better understand your finances. You will also understand how credit works. Apart from that, you also get a good grasp of the repercussions of a poor financial decision.
What is financial literacy?
Financial literacy is general knowledge of debt, credit, and money management. We use this term to describe the financial skills that help us make sound financial choices in everyday life. These include learning about how credit cards work, avoiding debt, and knowing how a checking account works.
Simply put, financial literacy impacts individuals as they make a budget and buy something like a house or a car. It also affects how they send their kids to school and ensure a retirement income.
The absence of financial literacy could adversely affect even advanced or developing economies. People in developed economies also have difficulty understanding economic principles that could help them negotiate the financial landscape. As a result, they also fail to manage financial risks and avoid pitfalls.
Why do kids need to learn about financial literacy?
Kids tend to copy whatever they see their parents do. A child’s mind is a “tabula rasa.” As such, it absorbs everything they see and experience in their surroundings. They start doing this from a very young age that you don’t realize what they have been picking up.
Kids know more than what you think.
Whether it’s making decisions or establishing buying patterns, children observe their parents on how they do things. They watch how their mothers and fathers spend their money. Experts believe that this could be a child’s earliest learned financial pattern.
A survey conducted by the Williams Group in 2014 revealed that parents don’t usually talk to their children about money. This is because they don’t want them to be entitled and lazy. Then again, the reality is that kids quickly learn about money concepts from others.
A study published by the University of Cambridge showed that kids as young as seven already understand basic finance concepts. But this doesn’t mean that talking to them about this topic is not good when they’re way past this age. There is even more reason these talks should happen as often and early as possible.
Parents and kids can learn together.
Kids often think that their parents have all the answers. While this may sound ideal, it’s not true. Most of the time, it’s not that the parents don’t want to share information with their kids. Chances are, they might not have the correct information.
This assumption makes the most sense. If you ask a random person the difference between universal life, whole life, and insurance, most of them may not know. The same is true when you ask people about business incorporation or about pre-approved funds, mutual funds, stocks, trusts, and interest-only mortgages. The reason most people wouldn’t know these concepts is not because they’re not smart. The most probable answer is that no one taught them.
Instead of hiding this fact from your kids, it’s better to use this opportunity to learn it with them. Since you’re a family, it’s better if everyone’s involved in the process. Talking about essential topics brings more conversations at home.
The conversation could come in various forms. It could be allowing your kids to listen to a business call and explain the details. The conversation could also mean teaching your kids how to trade. It could also be quizzing them on residential or commercial real estate.
Talking about finances now can better prepare them for the future.
Talking about finances is uncomfortable. No one considers this talk pleasant, especially if you also discuss what might happen in the future. While this will put you in a challenging situation, you need to realize this is part of looking out for them. It will be more difficult for them if you don’t have that talk now.
The Financial Education Evaluation Toolkit pointed out that the young without a background in financial literacy end up making poor financial decisions. These decisions often have lasting and costly repercussions.
Talking about financial matters early on could save your kids. Yes, it may take a lot of effort and strength, but consider that their life choices and future are on the line. Making them aware of the future financial challenges can better prepare them. It can also help them decide better. So, start the conversation soon.