The ultimate guide to make your family financially literate

Financial literacy must begin at home

How financially literate is your family and the people around you. If they are not financially literate, you must start the process immediately. In countries like the UK and Singapore, financial literacy is taken very seriously and embedded into the education system at a very young age. This empowers children to be savvy with their money at an early age. In Singapore, schools even give the same classes on finances to children and their parents, as parents are the single largest influence group for the children. In India, the education system still needs to factor in financial literacy as a serious topic. But you can make a start in your home itself. Here are a few interesting steps you can take.

Open Demat Account

Your first step to enter share market Get Started

* By signing up you agree to our Terms and Conditions

Teach children about time value of money

Today, most children know what is a bank and what it does. However, few understand why you keep money in a bank and why the bank pays you interest. That is where the concept of time value of money can come in handy. Money has an opportunity cost, even when not put to use. That means when you spend money or you keep money idle, you are foregoing some other opportunity; which is the opportunity cost. It is this opportunity cost that makes money valuable. Instill in your family members the downside risks of keeping money idle or in inefficient avenues. Many families have the habit of putting all their savings in a piggy bank or a savings bank account. Children must learn early on to make money work harder.

Budgeting will answer a lot of your financial questions

Budgeting is not just a record of expenses. Budget has a much larger implication. The whole idea of budgeting is to set targets of savings and then build your expenses around that. When you know that there is only so much you can spend, you will cut your coat according to the cloth. Alternatively, you will look at innovative ways of squeezing more savings out of your income and that is where most of the savings come from. You start looking at bargain sales, buying in bulk, buying online etc to match expenses to your savings targets. Budgeting is important for kids as it forces them to keep a tab on their spending. Let them record and account for each head of expense. Believe me, it surely instils financial responsibility.

Teach them to avoid high cost debt

From the days of Polonius, debt has been a bad word. We can qualify this by saying that more than debt, it is high cost debt that is really bad. In a world of easy credit, there is a tendency to splurge with your credit cards, ready consumer loans, ready personal loans etc. But all these loans have a high cost and there is nothing like a free lunch. If you have too many such loans with a high cost, you end up paying out most of the inflows as interest.  Your family must be told that the cost of borrowing is not just interest cost but indirect costs like impact on solvency and impact on credit standing. The family has to appreciate the importance of striving for a good credit score early on. Credit should be for appreciating assets, not for depleting assets. Earlier they learn to keep a tab on credit, the better it is.

Finally, the strange axiom of the risk of not taking risk

Equity is risk but it is good risk if done properly. Your family members must be taught the right perspective on risk. We often classify equities as risky and bonds as riskless; which is relatively correct. However, that is not true in the long run. It has been empirically proven that over the longer period, equities give the best risk-adjusted returns. That is why they are so powerful in wealth creation over the longer term. You must instil two important ideas about risk early on to your family members. Firstly, higher risk is essential for higher returns and that is where equity investing becomes important. Secondly, high risk does not automatically guarantee higher returns and hence risk must be calibrated and calculated.

In India, talking money with family and children is still considered taboo and it is normally left to the parents to decide. It is time to go beyond that barrier. You must start off with some solid financial literacy.