Financial literacy for kids: teaching the distinction between needs and wants

In today's consumer-driven society where advertisements and peer influences relentlessly tempt individuals of all ages, imparting financial literacy to children has never been more crucial. The cornerstone of sound financial decision-making is the ability to differentiate between needs and wants. Instilling this fundamental concept in children early on empowers them to make informed choices, cultivate responsible spending habits, and build a strong foundation for a financially secure future.

Needs and wants form the bedrock of personal finance, acting as filters through which individuals assess their spending priorities. A need refers to something essential for survival and well-being, such as food, shelter, clothing, and healthcare. A want, on the other hand, represents desires that enhance our quality of life but are not imperative for basic sustenance. Differentiating between the two is vital because it shapes how children perceive and approach their spending decisions.

Consider the scenario of a family's weekly trip to the grocery store. The child learns that items like fruits, vegetables, and dairy products are needs as they provide essential nutrients for growth and health. On the other hand, cookies, chips, and candies fall into the category of wants - they might bring enjoyment, but they are not necessary for sustenance.

Teaching kids the difference between needs and wants is crucial for several reasons. First, it lays the groundwork for financial responsibility. By understanding that resources are finite and must be allocated judiciously, children are more likely to make prudent choices as they grow. This fosters critical thinking, as children learn to analyse their desires and determine their true value. They question whether a purchase aligns with their goals and priorities, promoting a thoughtful approach to spending.

For instance, a child might express a desire for the latest video game console. By discussing whether it's a need or a want, parents can guide the child to consider alternatives. Could the money be better spent on educational materials, sports equipment, or other activities that align with the child's interests and personal growth?

Moreover, this distinction cultivates the skill of delayed gratification. Children learn to prioritise long-term goals over instant rewards which contributes to both financial success and emotional well-being. As they internalise the concept of prioritising needs over wants, they also build resilience against peer pressure and societal influences. This resilience equips them to withstand external pressures and make choices aligned with their values.

One of the essential lessons to impart is that we must allocate money to cover our needs first before considering spending on wants. Children should learn that it's important to fulfill necessities like food, clothing, and shelter before indulging in discretionary expenses. Once the needs are addressed, children can then decide whether to spend money on wants or save it for the future. This practice instills a sense of responsible decision-making and financial planning from an early age.

Consider a situation in which a child is given an allowance. They learn that a portion of the allowance should be set aside for needs, such as school supplies or a new pair of shoes, while another portion can be saved for larger future wants, like a bike or a special toy.

Several strategies can effectively teach the difference between needs and wants to children. Engaging in everyday conversations is an accessible approach to explain the contrast between buying nutritious foods (need) and indulgent treats (want). Encourage your child to express their thoughts on similar scenarios.

Visual aids, such as charts or diagrams, categorising common items as needs or wants, can be beneficial. Display these aids prominently at home, serving as constant reminders of the distinction. Role-playing activities, where children assume the role of a consumer making purchasing decisions, can bring the concept to life. Present various scenarios and encourage them to evaluate whether each item is a need or a want.

Consider another scenario where a child wants to buy a new toy. By discussing whether the toy is a need or a want, parents can encourage the child to think about their current toys and whether the new one would bring significant value.

Introducing allowance and budgeting is another effective method. Provide your child with a modest allowance, emphasising the importance of budgeting. Guide them through allocating funds for necessities before discretionary spending, reinforcing the principle of prioritisation. Decision-making games, such as board games or digital apps, can make learning about financial trade-offs enjoyable and interactive.

In conclusion, teaching children the difference between needs and wants is an essential first step in their financial literacy journey. By nurturing this foundational understanding, parents and educators can equip children with the tools needed to make informed and responsible financial decisions throughout their lives. As they grow into financially savvy adults, these children will be better equipped to navigate the complexities of the modern world, fostering a culture of prudent spending, goal-oriented saving, and overall financial well-being.

Tanzina Ahmed Choudhury, Head of Capital Market Research and Portfolio Management, SBAC Bank Investment Limited.