How to teach your kid elementary notions about money

According to a recent study, more than half of a lot of adults in Europe countries have no basic understanding about money. Maybe it’s the right time to teach your child to understand the meaning of money.( I know that my target audience is American, yet I am sure that this type of statistic is present in America as well, for example by viewing the study that said the average American does not have 1000 dollars for an emergency)

A few days ago, the National Bank of Austria published an extensive study on the perception of the inhabitants of South-East Europe on national currencies. However, the study also included some trivial questions about elementary notions about money.

In fact, if I had to say one thing about the answers to the 4 questions about money, it would be that over half of the Romanians do not have elementary notions related to this subject.

Obviously, the causes are multiple, from the lack of an elementary financial education course to the general school and to the complete disinterest of people in understanding such notions, as cat pictures on Instagram are easier to digest than dry figures.

Whatever the case, if you have a child big enough to understand simple product pricing concepts, it’s time to move on to the next step and learn a few simple notions about economics. Because, from my point of view, it is your parental duty to prepare your child for the future and not expect this from school or, worse, from … “school of life”.

Maybe you are circumspect about notions of money that you should explain to your child. Nothing is simpler, because we will take as a starting point the four questions from the survey conducted by the National Bank of Austria.

WHAT IS BANK INTEREST?

Question from the study: Suppose you have 100 lei in a bank deposit with an interest rate of 2% per year. If we do not take into account the commissions, how much money do you think you will have in your account after 5 years: over 102 lei, exactly 102 lei or less than 102 lei? Only a little over 40% of Romanians were able to answer this question correctly.

How to learn the right answer for your child

Tell your child that you give him 100 EURO, but at the same time tell him that if he chooses to keep them for one month, at the end of this period he will receive 110 EURO, corresponding to an interest of 10 EURO. Also, if you choose to keep them at a later date, you will receive 10 EURO each month (do not complicate the compound interest scenario, it does not make sense at this stage). With this opportunity it is possible to develop their first tendencies to save money instead of immediately spending on various products.

INTEREST AND INFLATION

Question from the study: We assume that the interest received at the bank for the money from a deposit is 4% per year, while inflation is 5% per year. After a year will you be able to buy more, the same or less than today? Here, only about 43% of Romanians were able to guess the correct answer.

How to learn the right answer for your child

Things are starting to get more complicated, but there is a way to easily teach your child. Try to make him perceive everything as a game. We start from the idea that you want to buy a product that costs 105 euros, but for which you only have 100 euros. You tell him he can leave the money to you for a 10% interest, so that at the end of the month he will receive 110 EURO from you. At the end of the month, he offered her the money, but he explained that, naturally, the prices of the products increase, and in his case the price of the product increased by 10%, to 110 euros. Thus, the child can afford to buy the respective product, but he does not have the remaining 5 euros expected, because the inflation was higher than the interest

LOAN IN A DIFFERENT CURRENCY

Question from the study: Suppose you take out a loan in euro and then your national currency depreciates in favor of the euro. How does this change the amount in your national currency that you have to buy for the loan: it increases, stays the same or decreases? Here things were better, in the sense that about 58% of Romanians knew the correct answer, but even so the percentage is very low.

How to learn the right answer for your child

Here you can use a simpler analogy, especially if you have already explained to the child that the prices of the products vary periodically depending on various factors. For example, tell him that two bananas have a cash value similar to an orange and explain to him that the money you give on two bananas can be used to buy an orange.

After a while, tell him that the price of a banana has gone down and that now with the money for an orange you can buy three bananas. In other words, bananas have devalued in front of oranges, because you have to “change” more bananas to get the same amount of oranges. Later, you can explain to him that the value of the coins also fluctuates in a similar way.

DIVERSIFICATION OF FINANCIAL RISK

Question from the study: When an investor invests his money in several types of assets, does the risk of losing money increase, remain the same or decrease? Well, only about 26% of Romanians correctly sensed that the risk is lower in case of greater diversity of assets.

How to learn the right answer for your child

A useful analogy for your child’s education (and which he will love very much) is to associate the investments with the toy cars. Tell him that if you buy him a single toy car, the chances of it ruining it while playing are higher, because he is playing with that car all the time. On the other hand, if you buy three toy cars with the same amount of money, the chances of ruining them all are lower, as they rarely play with each of them.

If you manage to make him understand these essential aspects of money, it will be much easier for him to understand how the financial system works. In addition, later it will be much easier for you to explain a number of useful financial tips during adolescence.

If you have other ideas for teaching kids how to understand elementary money concepts, feel free to share them with us in the comments section.

What do you guys think?

Let me know down below!

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