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3 Super Compelling Reasons for Why Kids Need Financial Literacy

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financial literacy Image: iStock.com/andresr

Discussing finances can be uncomfortable, especially in households that are in debt or struggling to make ends meet. What could prove even more detrimental, however, is avoiding critical conversations focusing on the essential elements of personal finance, especially those designed to equip children and young adults with the skills needed to manage money and ensure financial stability.

At a critically important time in our history, when countries are claiming insolvency and recessions are impacting global economies, one of the most important steps that can be taken is educating children at an early age on financial literacy. By instilling principles that will help children and youth avoid the type of fiscal foundering or bad money making decisions that can cumulatively weaken communities and cripple society, we can reap the benefits of a generation of pecuniary powerhouses.

Here are three compelling reasons to teach kids financial literacy early:

1. Financially Literate Students Make Better Choices 

Similar to the subprime mortgage crisis that began in 2007 and served as the primary contributor to the Great Recession, many students are borrowing more for their education than they are able to pay back.  This is due, in large part, to a lack of financial literacy training of high school and college students, who are unaware of the billions of dollars in grants and scholarships that are available for their educational costs.

President Obama has taken drastic action to alleviate the student loan burden, including capping monthly loan repayment to 10% of a student’s discretionary income and forgiving undergraduate loans after 20 years of payments have been made. Even with these measures in place, the best financial aid is that which students don’t have to pay back.  Access to personal finance workshops teaches students how to research free money for college, rather than defaulting to student loans to pay for school.

2. Two Words—Compound Interest

Albert Einstein once said, “Compound interest is the eighth wonder of the world. […] He who understands it, earns it. He who doesn’t, pays it.”  Your money can work for you or against you.  The sooner children are taught this lesson, the better off (and richer) they’ll be. Kids who start early will have a whole lot more and will have had to save a whole lot less than their peers who wait until later to start putting money away.

Here’s an example. Let’s say we have two young investors: Malik and Latasha. Both save $2,000 per year and earn a 6 percent return compounded monthly until age 65. Malik starts saving at age 19, while Latasha begins at age 27. At age 65, Malik will have $537,163 in his account and Latasha will have $319,687. Malik ends up with over $200,000 more than Latasha’s total, even though he only invested $16,000 more! That is compound interest at work.

3. Money Talk is not an “Equal Opportunity” Lesson

A Jump$tart Coalition survey showed that the vast majority of youth who were considered “financially literate” were white males from well-educated families. However, every child will eventually grow up and make many of the same major money decisions that their parents made, including buying a home, purchasing cars, and saving for retirement. Educating students from all socioeconomic backgrounds about money will play a pivotal role in ensuring that no youth are left behind.

These are only three of the many reasons why we must be intentional in teaching financial literacy to children and youth. The White House Initiative on Educational Excellence for African Americans believes strongly in ensuring that all children are literate in every sense of the word (including finances and health) and encourages the use of proven and effective strategies to support the work.

Norman West is the Co-founder and CEO of West Advisory Group, a financial literacy, education, and training firm based in Rochester, N.Y. David J. Johns is the Executive Director of the White House Initiative on Educational Excellence for African Americans.