One reckless financial decision is enough to affect one’s life both in the long term and short term. It’s complex and overwhelming. Yet, many are still not equipped to make an informed financial planning.
A large number of our young adults will fail a basic financial test. In Indonesia alone, a data from National Literacy and Financial Inclusion (2016) reveals that only 29.7% out of 67.8% respondents truly comprehend the financial service products in which they are involved.
It is clear that we don’t want our children to drown in major debts and loans, but at the same time, we never really prepare them with the skills needed to understand budgeting, bills, taxes, investment, etc. This knowledge is incredibly crucial as our financial choices are more challenging and globalized. Credit card debts, for instance, have reached its highest point and the majority don’t even own an emergency fund.
This urgency underlies the decision to put financial literacy as one of the 21st century skills, a set of competencies required for students to succeed in Information Age.
Young people possess an investing edge and what’s so-called a time advantage. Being taught earlier, this can lead to huge positive impacts when managed well. Warren Buffet, the legendary investor, bought his first stock when he was only 11 years old. He is now dubbed the third-richest person on Earth with a net worth of over $87 billion. To put matter into perspective, let me do the calculation for you.
Based on 10% interest rate, to retire at the age of 50 with 1 billion rupiah, you will need to save 450,000 rupiah ($US 32) per month if you start at the age of 20. The same investment made 10 years later will require you to set aside 1,400,000 rupiah ($US 100) per month, and 5,000,000 rupiah/month ($US 355) at the age of 40. So, the younger you start making these investments, the more returns it will generate in the future.
Moreover, there are some mindset differences between adults and young ones that will influence the results of their investments. The latter seems to be more willing to take risks as their future incomes will be able to afford this. They have time to learn from their mistakes and failures in addition to studying the market. As a result, the risk return trade off allows their aggressive portfolios to produce greater probability of higher yields. They are also provided with technology and easily-accessed information, including online opportunities and social media platforms to achieve their goals faster.
1. Start From Home
This type of education should start from home. As parents will form their children’s financial attitude, it is important to include your kids when doing transactions or paying bills so they understand the kinds of decisions and considerations involved. This behavior, according to a study by University of Cambridge, is constructed by the time your kids are 7 years old. So, turn a trip to a grocery store into simple lessons that will help them differentiate needs and wants. Avoid impulse purchases. Teach them to track down their expenses and evaluate them so they are used to making smart financial decisions in everyday life. Parents can also introduce loan and interest systems, as well as basic types of investment.
2. Utilize Technology
There are plenty of online courses that youngsters can take, along with mobile applications that resonate their interests. Use them to create playful budget, planned income, and expenditures.
3. Understand the True Cost of Things
Money is a finite resource, even for those belong in the wealthy category. Make sure kids know that when they spend their money on one thing, they will lose the opportunity to spend it on other things. This includes not being able to pursue their goals or losing certain opportunities. Emphasize that money is only a tool, but the true cost of it is hours of their life. Give children commission for helping around the house, so they understand that money does not come for free–it has to be earned.