A lack of financial literacy can have major consequences that last a lifetime, yet around 50% of Australians struggle with financial literacy as reported in a Household, Income and Labour Dynamics in Australia (HILDA) survey. The problem is more pronounced in women than in men.
In the survey, 50% of men obtained a 5/5 score when asked five basic financial questions, while only 35% of women achieve this score. Financial literacy is not something that should be left until after school or university, since many Australians will have to make decisions on aspects such as student loans when they are young.
How can you help your child build a good financial base so they can be aware of the consequences of issues like the type of loans they take or the importance of paying taxes when they are due?
A Little Help from (Professional) Friends
Unless your child completes their studies in economics or accounting, or unless parents or family mentors are knowledgeable on aspects such as interest rates, different tax obligations and the like, it is important to lead by example, relying on financial experts for key obligations.
For instance, if you are about to take out a loan on a car or even a new house, bring your children with you to meetings with your financial advisor. Afterwards, compare different loan conditions being offered by financial entities, showing how interest rates will affect the amount you end up owing.
If children are studying Business or Economics as part of their secondary studies or IB programme, then tutoring is a good way to address simple stumbling blocks — including complicated terminology and the application of business concepts in the real world.
Taxes are a Fact of Life
The Australian Tax Office reports that one in five Australian parents knows little to nothing about the Australian taxation system and superannuation and the same number of people do not feel confident explaining these concepts to their children. Studies also indicate that only 7% of parents are aware of these subjects being taught to their kids.
If you are insecure about financial subjects, then tutoring and a reliance on online resources can help you understand the major taxes Australians have to pay and how these taxes are calculated.
Don’t think that tutoring is only for children, or that it has to be long-term. Tutoring can also comprise a few key classes on taxes, or any other subject you request from a tutor.
Parents should also think of commencing a conversation with teachers and the wider community, to promote better financial education for children.
Learning about Taxes
You don’t have to go into the complete list of taxes paid in Australia (these include income tax, capital gains tax, consumption tax, Medicare levies, and the like). To start off with, concentrate on the concept itself.
If you give your children a weekly or monthly allowance, for instance, and this amount varies depending on the chores they complete, start ‘taxing’ them, using different interest rates. Of course, this ‘tax’ can be returned to them at the end of the month, but it can show them how much adults actually ‘lose’ depending on the amount they earn. Another way to show children how tax works is to show them a receipt.
Point out the amount that goes to sales tax and explain that this money enables the building of public parks, installations, and schools. Older children may enjoy seeing how the amount of tax you have paid differs year-on-year depending on what you have earned.
These are all optimal ways of showing children that it is normal to expect amounts to be reduced from their income so they can enjoy the myriad of public services available to Australians.
Finance can seem like one of the least exciting subjects children wish to learn but you can turn this on its head, by making learning fun. The first step to educating children on financial education is to learn about these issues yourself, through the help of a mentor or financial advisor.
Online resources are also helpful, as are fun finance apps developed for children. Finally, teach them about tax by showing them how part of what you earn and spend goes back to the government so that public services can continue to function well.