Teaching children financial literacy is one of the greatest gifts a parent can provide. By introducing them to the fundamentals of money management early, you empower them to make informed decisions and lay the groundwork for a secure financial future. In this article, I will share some practical strategies to help parents instill financial excellence in their children. There is no better time than now, to teach the next generation about financial literacy. As young people grow, introducing them to sound money management principles early can set them on a path to financial freedom. By fostering good habits early, teenagers can develop skills that will serve them well throughout their lives.
1. Understand the concept of Financial Freedom
The goal of achieving financial fitness is attaining financial freedom and financial independence. This should be the motive behind every financial decision or money choice made. Educate your teenagers and teach them there is a status called “Financial Independence” and encourage them to aspire to attain this status. Financial freedom is the status of having sufficient financial resources to live a desired lifestyle without being dependent on anyone or any job. It means having enough savings, investments, and passive income streams to cover your living expenses and financial goals. AN ABILITY TO meet your NEEDS and WANTS without DEPENDING ON ANYONE. Achieving financial freedom involves careful planning, disciplined saving, smart investing, and managing expenses wisely. It provides peace of mind and the ability to focus on personal growth, hobbies, and spending time with loved ones without financial stress. It happens when personal finance is well managed and one is financially fit. When your teenager understands that the goal is financial freedom, they will examine every money decision to see whether it takes them towards or away from the goal of financial freedom. Knowing early in life what the goal is, means they can start working towards this early and escape avoidable mistakes.
2. Pay attention to Financial Education
Parents must be intentional about teaching their children financial literacy and helping them understand how to effectively manage finances. Financial education is very essential if financial freedom is to be achieved. The earlier a person understands the elements of financial fitness, the earlier they can take control of their money and achieve financial freedom. There are numerous ways to gently introduce the basic money concepts of budgeting, saving, investing, and debt management. Money conversations – This should start with open conversations at home, in schools, and community workshops. It is never too early to start the “Money Talk” with your child. Communication is key in building financial responsibility in your children. Encouraging open discussions about their understanding of money, money challenges and achievements fosters a healthy mindset toward finances. Use educational resources and encourage them to read good money books. Financially independent and wealthy people often attribute their money habits to early financial education obtained from reading books. Some of the good books to read are Psychology of Money by Morgan Housel, Rich Dad Poor Dad for Teenagers by Robert T. Kiyosaki, and Secrets of the Millionaire Mind by T. Harv Eker. Other valuable books to read are ‘The Joys of compounding’ by Gautam Baid and the ‘The Richest Man in Babylon by George S. Clason. I recommend you encourage your wards to read one of these books as soon as possible. Register your children for financial literacy workshops and enrol them in financial literacy clubs where they can relate with other young people and stay accountable. You can also sign them up for online courses tailored specially for their ages to supplement your efforts. All these options provide valuable learning opportunities.
3. Pay attention to the value of Mentorship, Coaching and Financial Accountability
The role that a financial mentor or a finance coach plays in helping teenagers achieve financial excellence must not be under-estimated. Guide your children towards valuable financial mentors and encourage them to work with finance coaches. Any teenager who wants to excel in financial affairs must have a mentor they look up to, someone who inspires them to make better money choices and who they can learn from. Whilst a mentor will provide guidance from their experience to help them avoid mistakes, a finance coach will be more involved and will hand hold them as they walk towards financial fitness. The mentor can share real-life experiences, successes, and mistakes to help teens make informed decisions. Financial mentors can be parents, teachers, or community leaders that provide accountability and encouragement as the teenagers develop their financial habits. On the other hand, there is also much to gain by getting them to work with a finance coach. A finance coach will work with them to make sure they take practical steps and actions needed for financial fitness. These include introducing them to accountability tools like budgeting, spending trackers or savings apps which can help them stay on top of their goals.
- 4. Focus early on the Power of Saving and Compounding
One of the most impactful lessons to teach teenagers is the value of saving early. Very small amounts saved regularly can grow significantly over time, thanks to the power of compounding. For instance, a teenager who starts saving $20 a month at age 15 can amass a much larger sum by age 30 compared to someone who starts at age 25. Introducing teens to savings accounts and explaining how interest works motivates them to start early. It also helps to set specific, achievable goals, such as saving for college, a car, or even future investments. Parents should explain the concept of saving early and how compounding grows wealth over time. If the child is older, introduce the idea of earning interest through savings accounts and gently ease them into investing. Encourage them to save from gifts or small errands they run. Show them examples of wealthy people who started building their wealth early by investing and compounding.
- 5. Recognize the difference between Passive income and Active income
Understanding the difference between passive income and active income is crucial for teenagers striving for financial freedom. Active income is earned through direct effort, such as working a job or providing a service, where time and energy are exchanged for money. In contrast, passive income is generated with minimal ongoing effort after an initial investment of time, money, or resources, such as through dividends, rental income, or royalties. This type of income is typically generated from investments, rental properties, or businesses in which one is not actively involved on a day-to-day basis. Another way to distinguish the two is to define active income as income earned when a person works for money, either in paid employment or self employment. On the other hand, Passive income is earned when your money works for you. Financial freedom is achieved when passive income exceeds your monetary/financial requirements i.e. needs and your wants, and so focusing on passive income is essential for wealth creation. The goal is to focus on moving from active income to having more of passive income. When we teach teenagers the difference between the two income streams, they realize the value of saving towards investing in assets that will generate passive income. Teenagers must be informed and encouraged to think beyond being in paid employment. Earning a paycheck is good, but steer them early in life, towards creating sustainable passive income for financial independence.
- 6. Understand Needs vs Wants
Understanding the difference between needs and wants is one of the most fundamental lessons in personal finance, especially for teenagers who are just starting to navigate the world of money. The role these two concepts play in achieving financial freedom and creating wealth is key not only for managing money effectively but also for setting the foundation for long-term financial freedom and wealth creation. At the core, a need is something essential for survival or well-being. Needs are the things we cannot live without, such as food, shelter, clothing, healthcare, and education. These are necessary to sustain life and maintain our quality of life. On the other hand, a want refers to something that is not essential for survival, but rather something we desire for comfort, pleasure, or status. Wants can include items like the latest phone, designer clothes, a luxury car, or a new gaming console.
Teenagers today are living in an era of instant gratification, largely due to the digital age. Social media, online shopping, and targeted ads have made it easier than ever to get what they want, when they want it. The power of immediate access to products and services can create a sense of urgency, even for things that aren’t essential. The temptation to purchase a new pair of shoes, a trendy phone case, or a new video game becomes overwhelming, driven by the desire for instant satisfaction. It is important for them to recognize that true financial freedom does not come from the immediate satisfaction of buying what they want, but from the discipline of managing their money and making choices that align with their long-term goals.
- 7. Help your teenagers understand the impact of friendships and Social Connections
The friendships and associations teenagers keep play a critical role in their financial decisions. Friends can have a powerful influence on how teenagers view money, spending habits, and long-term financial goals. Peer pressure to keep up with the latest trends, spend money on outings, or invest in expensive experiences can lead to impulsive financial decisions. It is important to let your teenagers understand that surrounding themselves with friends who share similar financial values and priorities can contribute to healthier financial habits. For instance, a group of friends who focus on saving, budgeting, and learning about investments can encourage each other to make smarter financial choices. On the other hand, friendships based on superficial values or materialism can push teenagers to overspend or make poor financial decisions in an attempt to fit in. You should also warn your teenagers about their online presence and digital footprint. Digital footprint refers to the trail of data that a person leaves behind on the internet. For teenagers, this can include social media posts, comments on online forums, photos, videos, and even the websites they visit. While many teens may not realize it, this online activity is permanent and accessible by anyone with internet access, including potential future employers, schools, and even financial institutions. Help them know early that ‘the internet doesn’t forgive’, and to tread cautiously online.
Conclusion
Introducing your children to financial education is an investment in their future. By starting early and incorporating these money lessons into their daily life, parents can equip their kids with the knowledge and habits they need for financial excellence. Let’s prepare the next generation to not only manage money wisely but also to achieve lasting financial freedom.
***Bimbo Komolafe FCA, FCIB is a Certified Financial Education Instructor, a Fellow of the Institute of Chartered Accountants of Nigeria and a Fellow of the Chartered Institute of Bankers. She is the founder of the FinanceCoachBK financial literacy platform where she provides financial coaching, and organizes annual Financial Literacy workshop for teenagers and adults.
***Connect with her online to access more resources to help your journey to financial freedom. Visit her Youtube channel @ financecoachbk to watch recording of the FCBK annual Financial Literacy workshop from 2021 to 2024.
Send an email to Financecoachtoday@gmail.com if you want coaching or mentoring for your teenagers.
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