When we talk about financial literacy for children, we usually only focus on the conceptual definition. Adapting the definition from Otoritas Jasa Keuangan (OJK), financial literacy is a series of processes or activities to improve the knowledge, confidence, and skills of a person and the wider community to manage their finances well. Following this definition, we are often fixated on the term “financial management ability” and the assumption that children do not need this ability. We think, “they still ask their parents for money, where do they want to manage money from?”. When we have such thoughts, we forget one crucial thing: financial literacy is an ability that needs to be formed, not an ability that suddenly emerges as children reach adulthood.

On the other hand, how many problems do parents face when receiving various demands from their children for the latest gadgets, bags, shoes, or trending clothes? When there are such conflicts, parents presume that the child does not understand their family’s financial situation, while the child sees the parents as neglectful of their needs. In extreme cases, children even run away from home or hurt themselves when their wishes are not fulfilled. Educating children as early as possible about financial literacy could prevent these various problems regarding parents and children. Why can financial literacy prevent these problems? Because the basic principle of financial literacy is to educate children to distinguish between NEEDS and WANTS. For example, when children’s shoes have holes, it becomes a “need” to get a replacement (be it used or new shoes). However, it becomes a “want” when they buy certain expensive brands because they are trending.

To educate children on financial literacy, parents could teach two main components, they are:

1. Saving and Spending

At this stage, we teach children the habit of saving and sparing, not only for reducing spending or saving money but also for various things children use every day, such as electricity, water, food, and time. To form this habit, use the “small but steady” principle, meaning that the nominal savings may be small, but it is done regularly. This routine will shape children’s mindset about how it is better to periodically save Rp1000/day rather than Rp100,000 but not regularly. The second step to form a habit is to prioritize sparing money rather than spending it. If parents give 5,000 for daily pocket money, agree with the child about how much will be saved and how much will be spent. Often what happens is the opposite; saving is done if there is remaining pocket money. Meanwhile, focusing on the previous explanation regarding spending, teaching children to distinguish between needs and wants is essential. Therefore, saving money should be done first before spending it.

2. Planning and Budgeting

When we educate children to save, we also need to educate them to make a basic financial budgeting plan; the simplest form of this plan involves income and expenditure columns. Planning and budgeting will also help children determine their saving goals, become more responsible, and manage available resources. For example, a child plans to save up for a bicycle; however, they are tempted to buy other things. With planning, they will realize how much of their savings will need to be allocated outside of their goals to afford the things that they are tempted to buy.

However, in teaching the two components above, it is important to remember how parents must set an example for their children. The process of shaping behavior in children will be more effective when children see their parents doing the same thing. If you want your children to create a habit of saving, then you must also set an example. Children learn more from what they see and less from what they are only told to do.

Author: Fitriana Herarti, M.Psi., Psikolog
Child Development Specialist – ChildFund International