Everyone is always talking about "the economy." Saying “the economy” usually refers to the economy of the country where they live. The economy is about how money made and spent. Usually, what we mean we talk about the economy, is: who has money? Who doesn't have money? Are people getting richer or poorer?
The economy is doing well when there are plenty of jobs and businesses that are making money. The economy isn’t doing well when people are losing their jobs and it is hard to find new ones.
There are many definitions of financial literacy. Generally speaking, one could define it as a combination of awareness, knowledge, skill, attitude, and behavior necessary to make sound financial decisions and ultimately achieve individual financial wellbeing. It has been shown that people with poor financial literacy have been shown to save less, to a lesser extent plan for pensions, more likely to pay higher fees for financial transactions and more likely to have problems with their home mortgages.
Given rapid socio-economic transformation, digitalization and technological change, young people of today are facing more challenging financial choices and more uncertain economic and job prospects. Given the fact that financial insecurity has a great impact in our overall well being, the issue of financial literacy is more important than ever.
We can conclude that measures need to be made if children are to make better financial decisions than their parents’ generation.
Different kinds of economy
In reality, economics means to manage available resources. You should know that there are different kinds of economics. Microeconomics, macroeconomics and household economy.
If we have £100 to spend, how do we best do so to make everyone happy? Macroeconomics; also called the political economy, we look at how countries spend their £100. Some countries spend more on healthcare, others on entertainment. In microeconomics, we look at how businesses and people spend their £100. The household economy is about splitting the £100 within the house or family.
What is household economy?
All persons living under one roof make up a household, together. If those persons are relatives, it is also called a family. The household economy is about how we split the money that the household, or family, has to share.
Usually, a family has a shared budget. A budget is a summary of how much you earn and how much you spend.
Household economy example
A family of 4 splits the money earned among all members of the family
mom earns £3,000 at her job every month, and dad earns £2,800. Both of their kids still go to school.
Mom’s salary + dad’s salary = £3,000 + £2,800 = £5,800
For the family of 4 everyone has to come together and agree upon how to best spend the salary of £5,800. It might look something like this:
Microeconomics is about how individuals and businesses behave and spend their money. Questions answered by microeconomics:
Why do people choose to buy one product and not the other? How many products do we need in a store to keep up with the people who want to buy it? What makes companies decide on a price? Why do some jobs make more money than others?
Macroeconomics, or political economy, take a look at the world as a game of numbers. If we put all families, companies and people in a country into one basket, what does the economy look like? Questions answered by macroeconomics:
How much do all the people in this country sell products for? How many people have jobs? How much is 1 British pound worth compared to 1 U.S. dollar?
The concepts of trade, jobs and economics, are all a part of macroeconomics. But what does it actually mean?
Trade is the exchange of something for something else. Usually, we trade with goods for money, money for a service, etc. You get the idea. But trade is also an exchange of things.
Jobs and employment rate. Employment rate refers to the number of people who have a job of any sorts. One person can have several jobs too, but this does not affect the employment rate of a country.
Economic growth is the increase in value of goods and services produced in a country or region. Economic growth is often used as a sign that the economy is good.
Finance for kids
Kids who have an understanding of personal finance will have a head start in life. Unfortunately, it's a subject that both parents and schools tend to ignore.
As most schools aren’t teaching finance, the responsibility falls to parents. As a parent you should try to broach the subject, even if you don’t feel qualified. There are plenty of online resources for you to look at together with your kids.
To get you started, we have a collected a set of financial terms below that you can; and should, teach your kids.
Saving is one of the best topics to introduce at a young age. It’s easy for kids to grasp and can have a huge impact on those who embrace it early. “Saving means not using all your money right away, but instead putting it aside for later”.
See our article on child savings accounts for more advice on how to save money for, and together with, kids.
An investment is when you spend money on something today, hoping that it will earn you more money in the future.
Kids should know that there are two sides to investing. People invest in things that they believe will make them more money, but it doesn't always happen that way. Putting all your eggs in one basket is, generally, a bad idea. If you put all your money in a risky investment, and the investment fails, you could lose it all.
Taking a loan means borrowing money. A loan is not free, rather we have to start paying back soon, with interest. Most kids get the concept of a loan because, at one time or another, they’ve lent something to a friend or sibling. Borrowing money is the same basic thing.
As a parent, you should be upfront with your kids when you talk about loans. You should emphasize that taking a loan isn’t a bad thing, but, when you take on a loan you have a responsibility to pay back.
Explaining loan and debt is best done together. Like a loan, a debt is money that you owe someone, and that should be repaid. A mortgage can be a good way to illustrate how debt works.
As a parent, discuss your own mortgage with your kids. Explain that you borrowed money – took on debt – to buy a house and that you are paying this back, a little bit each month.
Kids need to understand that once you have a debt, it doesn’t go away until you’ve taken care of it.
There are two sides to interest. There is interest that you owe, and interest that someone owes you. Interest that you owe is usually for a loan.
Interest that someone owes you is best explained with an example. "Your sister runs out of pocket money, but needs money this weekend. You could lend her £20, but returning the favour, you ask her for £2 in interest, which she will have to pay you back next week."
Read more about how interest works and what accumulative rent is
A stock is a piece of a company. When you own a stock of a company, you own a small piece of its business. Every stock has a price and that price can go up or down, depending on what's happening at the company.
Learning about stocks can be particularly fun as kids get older. There are plenty of games and apps for creating virtual stock portfolios. There are great online tools for simulating the movement of stock prices. With these tools, they can simulate how much money they would have made or lost if it was real money.