Putting Financial Literacy Into Action

April is National Financial Literacy Month, a themed month first championed by the Jump$tart Coalition for Personal Financial Literacy. This effort could not be more timely. US personal savings rates are woefully inadequate to meet retirement needs. Millions of homeowners are facing foreclosure, often because they signed on for mortgages they are not in a position to handle or did not fully understand. At the root of many individual or macro financial problems is often a lack of financial education--and financial education has to start early.

The Jump$tart Coalition promotes six basic financial competencies as part of its standards for personal financial education in grades K-12. Here are some suggestions from MoneyRates.com to teach children these competencies through real-life situations:

1. Apply reliable information and systematic decision making to personal financial decisions. When it is time to open a bank account for your child, use MoneyRates.com as a resource to explain different deposit options (for instance, the difference between savings accounts and money market accounts) and what they offer, as well as the benefits and drawbacks of online banking. Have your child also compare different bank rates and come up with a suggestion for where he or she wants to open a bank account.
2. Use a career plan to develop personal income potential. Money shouldn't be the sole factor in determining a career choice, but people should know what they are getting into financially when choosing a career. When your children become old enough to start thinking seriously about careers--probably in high school, before decisions about college and majors start being made--have them research earnings information for their intended professions and compare that to earnings in other professions.
3. Organize personal finances and use a budget to manage cash flow. The first time your child expresses an interest in saving up for something, use that as an opportunity to show how much they'd have to set aside each week and help them monitor progress toward that goal. This can be as sophisticated as introducing them to personal finance software or as simple as setting out a glass jar to collect savings.
4. Maintain creditworthiness, borrow at favorable terms, and manage debt. Just about every child asks to borrow money against future allowance or earnings at some point. Use this as an opportunity teach your children about borrowing--have them write down the reason for wanting the money, and work with them on creating a repayment schedule. Most of all, make sure each child understands that meeting those repayment obligations will affect his or her ability to borrow money in the future.
5. Use appropriate and cost-effective risk management strategies. Use news stories about natural disasters, accidents, or other incidents as an opportunity to discuss the concept of insurance. It is important to make the connection to real-life examples of financial setbacks to help a child understand the need for insuring against financially disastrous possibilities.
6. Implement a diversified investment strategy that is compatible with personal goals. You may not have the means to allow your child to invest real money, but keeping a paper portfolio and following its ups and downs is a good way for a child to start to get familiar with the behavior of stocks and other investments.

Financial literacy should be taught so that children are introduced to the fundamental financial concepts they will encounter throughout their lives, but financial literacy should also be applied from an early age onward, so the lessons will stick and each person can gain experience before starting to make decisions that really matter.

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