According to the 2015 S&P Global Financial Literacy Survey, only 57% of adults in the U.S. possess basic financial literacy. The survey covered simple concepts such as diversification, how interest is calculated, and how compounding works.
The statistics are even worse for high school students who, according to the Programme for International Student Assessment, have a mere 18% financial literacy rate. Without intervention, almost half of those financially illiterate students will grow up to be financially illiterate adults. With student debt topping $1.3 trillion, something needs to change...
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There have been calls, both nationwide and around the world, to have mandatory financial education in schools. The general consensus is to start in high school, but research shows that children are ready at a much earlier age. They have the capacity to understand much more about investing than we give them credit for. Parents will be a child's first financial teacher and can help them understand the difference between short term savings goals and long term investing goals. Risk can be explained with an age appropriate example of how much they are willing to lose for a bigger reward. Diversification is easily explained to a child with the tried and true "What would happen if you had all your eggs in one basket and you dropped it?"
There are however, a couple of stumbling blocks that need to be overcome:
1) How do you engage kids financially, when the truth is they're just not that interested in Grandpa's investments.
2) Financial education in itself, is not enough to guarantee that children will grow up to be money savvy adults. To retain what they have been taught, there must be accompanying real life practice.
Cryptocurrency offers a novel solution that today's digital youth will find intriguing.
Many children are already familiar with digital payments because of their experience with video in-game purchases and tokens, as well as pre-paid credit and gift cards. It is not a big step to introduce them to cryptocurrency or "internet money". Unlike many adults, kids will have no fear trying this out and will find it pretty cool that they can invest in something like this.
One of the biggest differences in investing in digital currencies such as Bitcoin versus the stock of various companies, is the cost involved. Each stock purchase can come with a hefty fee and minimum purchase requirements. If you are spending hundreds or thousands of dollars on each stock purchase for a child, you need to make darn sure they pick one that will stand up to Grandpa's scrutiny.
With cryptocurrency, minimum purchase requirements vary depending on the exchange, but .0001 bitcoin (less than 5 cents) is a common amount. With currencies priced to the eighth decimal, fractions of a single coin can be purchased - this also makes a great math workout for kids. The exchange trading fees are miniscule - for example, Poloniex charges only .2%. You must be 18 years of age to sign up for an account at an exchange, so a parent or guardian will have to help with this. Mastering how to buy and sell on an exchange can give them the confidence to manage their own investments when they get older.
Having an extremely low cost base like cryptocurrency, allows children to make mistakes without suffering financially. They can learn some very valuable lessons through the experience of picking their own investments.
At this early stage of development, Cryptocurrency is a high risk investment, so never invest more than you can afford to lose. I recommend testing the waters by giving up a non-essential purchase you would have spent money on anyway and using those funds to make your currency purchase. If you are investing more than a few experimental dollars, do your due diligence and fully research the currencies you choose.
If you aren't quite ready to let your kids buy cryptocurrency, you can create a practise game at home or at school. CoinMarketCap lists the market cap, price, supply, 24 hour volume, % price change, and a price graph of over 600 digital currencies. To make life easier, have the children select a few currencies from only the first page or two. Record today's price as well as how much they bought of each and then follow up each week updating the price. Some of the currencies have wild price swings and not all of them are trustworthy, but this is a good teaching tool to cover those topics as well. A competition could be held with each child receiving a certain dollar value of play money to invest, with the winner having the best performing portfolio after a certain time frame. Either way, kids will begin growing and tracking their investments through the ups and downs, and be on their way to join the ranks of the financially educated.