In the money world, the term “financially literate”—or a related derivative—gets tossed around quite a bit. Not a whole lot of experts actually take the time to define exactly what financially literate means, leaving many statistics related to money habits void of their importance. Kids especially need a definition as they learn how to handle funds, because without it, they don’t know if they’ve reached the goals you want them to hit.
Definition: Part One
On the most basic level, financial literacy is simply about being knowledgeable. It means that you understand fundamental facts about money, such as the value of cash coins or bills. You also grasp standards and routine practices, such as the fact modern people generally pay for things with plastic (debit or credit card). With this information, you are able to follow most everyday conversations about money.
Definition: Part Two
Having some core data about money is a good start, but being truly financial literate requires even more. A person who is financially literate also can apply the information he has, resulting in monetary gain. For example, if an investor sees that the value of his stock has consistently gone down over the past year, he can look at market projections to make an analysis and decide whether to sell his shares. Under this part of the definition, someone who has good information but routinely lets it get overshadowed with bad money habits, or who consistently makes money decisions that result in losses, is not truly financially literate.
Definition: Part Three
The last part of the financial literacy picture is the fact that money practices and standards are constantly changing. A few decades ago, for example, there was no such thing as a debit or credit card. Literacy in money, therefore, means that a person is willing and able to gather additional information over time. His perspective on his assets does not necessarily stay the same based on the data he gets and the circumstances he is in.
Putting It All Together
As a parent, a lot of the focus in terms of teaching financial literacy is on what to show your kids and the techniques necessary to get the information to stick. But this is only half the battle. A basketball player, for instance, can’t simply be given a rule book and ball and be expected to perform like a pro, hitting every free throw or jump shot. He has to practice. Part of teaching your child to be financially literate, therefore, is to give your child opportunities to apply what he has learned. For example, if you want him to understand how to negotiate prices, you might take him to a farmer’s market or art fair where sellers are sometimes willing to haggle.
Secondly, you cannot think your job is over once your child has a lot of good information. Much as technology buffs frequently update their machines and gadgets, you need to check that the information your child has about money is current. For example, as of 2013, the United States still uses the penny, but there might come a day when, like Canada and other countries, America does away with its smallest coin. Lawmakers are addressing issues of economics and finance regularly, particularly in regard to trade and balanced budgets, so even simple things such as whether your child needs to take a money-related course in high school as standard practice might shift. Be prepared for these changes and your child will learn how to be not just a learner of money, but a lifetime learner of money.