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Financial Literacy: What It Is, and Why It Is So Important to Teach Teens

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India is one of the fastest growing economies. However, surveys reveal that only 27% of the population is financially literate. Moreover, only 16.7% of Indian students have been introduced to the concept of finance and money management. 

Inculcating financial literacy at a stage where young minds have the most significant time advantage is beneficial. Especially with the rise in the ‘gig economy,’ it becomes crucial to introduce them to how the world works. How exactly? What is financial literacy, and how can it be infused early? Read further to find out.

Financial Literacy Meaning:

Financial literacy involves understanding and applying financial skills like budgeting and investing. It forms the basis of your money management and is a lifelong learning process. Starting early is crucial for financial success because experience is vital. 

Skills such as budgeting, saving, choosing favorable loan terms, understanding credit’s impact on borrowing, grasping taxes and insurance, and differentiating retirement options come under financial literacy. It empowers people to make informed choices and handle money responsibly. Moreover, it fosters self-sufficiency and leads to financial stability. 

Components of Financial Knowledge:

Financial literacy encompasses various skills and knowledge essential for adequate money and debt management. Here are the core components:

  1. Budgeting: Budgeting involves allocating money for spending, saving, investing, and charitable giving. Budgeting can follow various approaches, for example-
  • Zero-based budget: In this, it is anticipated that your monthly income and expenses will be fixed to some extent. Say you earn Rs.50000 and spend around Rs.30000 on monthly expenses, Rs.10000 on savings, and Rs.5000 for investment, keeping the remaining for leisure. After calculating everything, the end result (income minus all expenses) should be zero as per this approach.
  • Pay yourself first method: Here, your primary aim is savings and repaying debts. So, you set aside a fixed amount first and spend the rest as you deem fit.
  • 50-30-20 method: Here, 50% of the income is kept aside for necessary expenses, 30% for discretionary ones, and 20% for savings or debt repayments. 
  1. Investing: Understanding investment essentials like interest rates, diversification, risk management, and market indexes enables informed investment decisions that can enhance income over time. For instance, just starting a SIP won’t suffice; you need to check the industry trends, exit charges, fund performance, and inflation rate in the economy to calculate your true profit. 
  2. Borrowing: Like most individuals, you may borrow money at some point. Knowing interest rates, compound interest, payment terms, and loan structures is essential to avoid long-term financial strain. 
  3. Taxation: Being aware of different forms of taxation and their impact on net income is vital for financial literacy. Understanding tax implications enables individuals to optimize their financial strategies and maximize after-tax income, whether income tax from employment, capital gains from investments, or property taxes. Moreover, it is also essential to know about tax rebates and available deductions like the 80D deduction to reduce your tax liability. 
  4. Personal Financial Management: This encompasses the holistic application of budgeting, investing, borrowing, and tax knowledge to achieve financial security, strengthen investments, improve savings, and reduce debt.

Importance of Financial Literacy in Teenagers:

  1. Avoiding misinformation:

Neglecting to educate your children about money can lead to future problems. Although teens learn some financial literacy at school, they may pick up misconceptions from friends or adults with poor money skills.

  1. Differentiating ‘needs’ and ‘wants’:

Adults distinguish between needs (food, shelter, clothing) and wants (luxuries like fancy coffees, vacations, or gadgets). However, tweens and teens often blur this line. Teaching financial skills helps them identify their needs and wants and even helps them avoid huge debts in the future.

  1. Value of Money:  

Earning their own money, even through chores, teaches teens the value of hard work and responsible spending.

  1. Practiced Independence:  

Giving teens controlled spending opportunities, like with prepaid cards, allows them to make choices and learn from them under your guidance.

  1. Scam Awareness:  

Teens are vulnerable online. Financial literacy teaches them to protect personal information, be wary of suspicious links, and become critical consumers who compare prices and research purchases.

Strategies to Build Financial Literacy:

To involve teens in the process, you can integrate these practical tips into your daily routines for a fun and educational experience-

  1. Managing allowance money:

You can give them a regular allowance and let them use it however they want. This will help them learn about tracking income and spending and manage their spending habits.

  1. Differentiate Wants from Needs

Help your child distinguish between wants and needs. Explain that needs are essentials like food, shelter, clothing, healthcare, and education, while wants are extras like movie tickets, candy, designer items, or the latest gadgets.

  1. Play Money Games: 

Use games like Monopoly or Life to teach financial lessons in a fun way. By strategizing during these games, your child can learn about budgeting and planning for the future without realizing they are being taught.

  1. Create a Dream List Together: 

Make a list of priorities with your child to promote financial literacy. This instills the patience for planning to achieve goals over time.

  1. Allow for Mistakes: 

Let your children learn from financial mistakes. Instead of intervening to prevent errors, use them as teachable moments to empower them with financial responsibility. 

  1. Provide a destination for money saved:

When kids start saving money, provide a secure place to park it. For younger ones, a piggy bank works well. Older children might benefit from their bank savings account or a kid-friendly debit card. Introduce them to banking basics by helping them open a savings account. Teach them to deposit money, track balances, and understand basic bank statements. 

Bottom Line:

Mastering finances is crucial. Though there is always time to start, beginning early ensures the foundation is strong when young minds enter the corporate world. Financial literacy enhances academic motivation, community ties, and a sense of belonging. 

Parents must teach teens financial skills. Multiple creative ways exist to incorporate the financial curriculum into daily life smoothly. So start early to secure a prosperous future that will change the way India approaches financial literacy.  

Are you starting your financial literacy as well? Keep reading, keep learning, and consult a SEBI-registered share market advisory for a comprehensive personal finance guide. Answer questions like ‘What is a post-market session?’, ‘What is CMP in the stock market?’ and ‘How do I pick the right long-term investment stocks to buy?’ and get off on the right foot with investing. 

FAQ

  1. What do you mean by financial literacy?

    Financial literacy involves understanding essential financial concepts like savings, investment, taxes, and credit. It encompasses money management, budgeting, risk awareness, and recognizing scams.

  2. What are the three keys to financial literacy?

    Financial literacy revolves around developing the following key skills-
    Budgeting- Managing and keeping track of income and expenditures is step one in managing one’s finances. 
    Saving and investing: This is how one learns to build financial security, set monetary goals, and work towards them while keeping a portion aside for emergencies. 
    Managing debt or credit: This involves managing debts and including ways to avoid them. Additionally, it discusses credit records and credit scores that can help one improve one's creditworthiness. 

  3. What is financial literacy for beginners?

    Financial literacy means grasping and using various financial skills, such as budgeting and saving. It empowers individuals to achieve financial stability and self-sufficiency.

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I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.

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