Step 1. Giving your students the gift of financial literacy
Money is often considered the most powerful tool in today’s society and daily life. It can affect every aspect of life and its importance has become undeniable. From an early age onwards we all have to deal with the relevance of money, whether it is about saving up to buy a new bike or financing college funds.
There are all kinds of external factors that decide how relatively easy or hard it is to earn money or save funds. Many of us are generally not well enough prepared (with knowledge and strategies) in order to deal with the little control that we do have outside of these external factors.
More and more we see that financial decisions made early in life (like taking out a student loan) will have an impact on someone’s future (housing, income, payment etc.).
Unfortunately, taking on debt and dealing with financial struggles can be stressful and could ultimately impact your health and well-being. For more information on that topic, check the guide “How to help your students improve and secure their financial health & wellbeing”.
Explain what financial literacy is
In short, it is the ability to understand how money works, but more importantly Financial literacy can be a significant step in preventing and overcoming this kind of stress. It can train you in interpreting the meaning of money and how to deal with it in the most efficient ways.
With the knowledge you gain, you are able to develop the way you come to financial conclusions and actions and you learn to take care of your own funds. It helps you build a stable foundation from which you can grow financially and personally. The main goal is to change your ways of thinking when it comes to money. When you change a thinking-process, it becomes much easier to change the subsequent actions and patterns in your life that might be keeping you from becoming financially stable at the moment. The ultimate goal is to become financially free and healthy.
There are many steps you can take and many directions you can follow in order to become financially literate. It might take some effort, but the advantages can be great and everlasting. Educate your student and have them commit to a new mindset, lifestyle and so that they can find themselves becoming financially literate and healthy.
Explain the five key components of financial literacy
In this stage you can help your students with a budget plan, using the Digipass budget calculator. Make sure you explain the five key components and that they should be realistic about each and every component. This is where financial awareness and financial responsibility will play a significant role.
1.Earnings: The first component of financial literacy is calculating the net monthly income. It is extremely important to understand gross versus net in income (e.g. salary), the difference is formed by the taxes that will be deducted from the gross amount, leaving the student the net amount that they will receive. Explain that income can include salary, funds from a side job/hobby, tips, bonuses, crowdfunding and other income.
2.Spendings: This accounts for all the costs students have and it is important for students to know where the money is being spent on. This second component is a personal reflection of the student’s values, lifestyle, and their financial behavior. The student needs to get a clear idea of the difference between the things they need and want, since this is the basic concept that will help them control their spendings.
3.Savings: A part of financial education is to set up an emergency fund and to save a bit every time every month when earnings come in. The younger students start with this, the better prepared they are later in life.
Explain to them that they should avoid going into debt or experience financial stress caused by an unexpected event. The Savings component is important since it is critical for the student’s financial health & wellbeing, a state of being wherein a person is in control of their finances and is able to meet all current financial commitments.
It’s about having a sense of financial security, feeling confident about their financial future and the financial decisions they will make. Next to savings for emergencies, inform students about budgeting for unforeseen costs in all sorts of financial (project)plans. Normally these unforeseen costs are between 10% to 20% of the budgeted financial (project)plan. Let students do the math what is feasible for them to include as unforeseen costs. They will need to think critically and realistically.
4.Borrowing: Borrowing basically means you buy a debt in order to gain more profit later on. You can ‘buy debt’ to purchase an asset that will acquire long-term wealth, or you can use it to finance your education which in turn will support your career and long-term wealth.
There are many ways to use the concept of ‘borrowing’ to positively benefit your wealth. Be aware that borrowing money, costs money.
There is almost always an interest rate involved that you will have to pay back. Students could end up with debts that they are unable to pay off. Therefore let them plan ahead for what they want to borrow and make sure they have clear and realistic terms of paying back the amount they borrow.
They should have a clear understanding of terms such as interest rates, time value of money, payment periods and loan structures. When advising your students, acknowledge that they could already have a student loan (and maybe an expensive repayment plan). Getting into more debt will have an effect on their future lives.
5.Protecting: In the digital age internet fraud is extremely common. Financial information is more vulnerable to fraud so students should be advised to keep their information as secure as possible.
This really is an essential step to take when thinking about financial literacy. Understanding this, along with preventative measures, like password protection and limiting the amount of information shared online, can be the key to maintaining your financial accounts safe.
Always advise students to check the financial safety in the country of destination. All of this is not infallible but having that knowledge will safeguard their finances as best as possible to avoid any existing threats and risks.
Step 2. Helping your student to be financially resilient
Explain what financial resilience is
Financial resilience is the capacity to cope with negative income, or spending shocks, or to recover quickly from periods of financial setback. It’s likely that students are going to face some sort of a financial crisis in life and this could certainly happen while they are abroad. It could come in all sorts of forms, from a job loss, a health crisis, death of a loved one, identity theft, a global recession etc. The most troublesome thing about a financial crisis is it is usually unexpected and beyond someone’s control. The true goal of financial resilience, therefore, is to remain undamaged or unaffected.
Explain the five steps of financial resilience
1. Prepare: Short- or long term, financial illiteracy is costly. Therefore it is important that students begin with preparing, already thinking about and setting up a plan to improve their current and future financial situation. As stated they think realistically and critically on how to lower the cost of living, paying off debt, increase income and establish a sound and solid financial emergency plan/fund. Realize that the ability to rebound after a major money costing happening is directly proportional to the financial situation before the event occurs.Meaning that if someone is low on savings, not able to live by a budget, have high debts then the recovery time is significantly extended.
2. Practice: Practice creates habits. Furthermore, it predicts future performance. In other words, the more you practice the better you perform. Before the financially stressful event has taken place, practice by budgeting. Live by a budget, since this provides insight in financial habits and allows someone to take power on deciding where the money goes.
3. Be mindful: Stress and fear, makes someone more susceptible to making poor decisions and causes the individual to be vulnerable to financial threats and risks. So instead of panicking, students should be mindful while assessing their financial situation. To be open minded allows the students to explore all of the possible solutions first before deciding on a certain course of action. Oftentimes people feel shame in a financial stress event. A safe space is important here, so that they will be comfortable to open up and be vulnerable. Seeking and asking for sound and objective financial advice is their next step. Later on in life they will use the experience for the better and will even be able to help others in financial hardship.
4. Prioritize:: When students are in a serious financial downfall, they could be forced to decide on which bills to pay and which not. Therefore it is essential that students learn to prioritize. First and foremost, students should have their own health and safety as their first priority, to guard that they will be able to still function normally. A clear state of mind is important to make a list in the order when bills need to be paid instead of just randomly paying them. Having a plan helps to remain calm so that sound financial decision making can take place. It ensures that they can make the right adjustments in their course of action if the situation changes. If it looks like bills will not be paid on time, they should reach out to the billing companies on time so as to make sure that no additional costs will be made causing a downward financial spiral.
5. Being proactive: To avoid serious financial negative consequences, students need to be proactive early in the process as this will allow them to chart and manage the course of action. The proactive process begins with a budget revision to reflect the loss of income or rise of spendings.They should be critical about the ‘needs’ and ‘wants’ in spendings, cutting any unnecessary spendings. By being proactive, they will learn that with failing comes learning. It will provide them with a brave space in which there should be no guilt and shame by going through financial hardship and asking for help. Being brave will create light at the end of the tunnel.
To help students in becoming financially literate and resilient before their mobility abroad, advise them to be mindful about their financial situation now, during and after their mobility. Reflecting on lessons learned will have a positive impact on future financial decision making. Let them know that most people at one point will experience and regret a financial decision made in life, but by being brave and learning from failing, they will be their own financial hero. One way to practice mindfulness is by relaxing and breathing. For more information, check out The DIGIPASS Health & Wellbeing Toolkit – How to do breathing and relaxation exercises
To conclude, know that the CQ model of Drive, Knowledge, Strategy and Action also applies when it comes to financial literacy and resilience. First, there needs to be a willingness, a certain energy, focus and persistence to work on own’s financial situation. Secondly, someone needs to have enough knowledge when it comes to finances (financial literacy). Thirdly, there is the ability to adapt mentally in which one should plan financially (for the present and future). Lastly, now that a student has the drive, the knowledge and a plan ready, it is important to act. Only then a behavioural change will be possible and students will set themselves up for a positive and healthy financial future.