How do we explain to children what inflation is? - part 2
Inflation affects us all to some degree, including children
The effects of inflation — How does a child feel about inflation?
Inflation, like any economic phenomenon, has several effects that are felt at both the macro and micro levels. This means that although many things will change in the country’s economy, there will be some effects that will be felt in your family and, most likely, by children.
Rising prices — The first and most noticeable effect is rising prices, which leads to a decrease in the purchasing power of money. To help children understand this effect, show them the evolution of the Consumer Price Index and the average basket of goods from year to year. If last year with 100 lei you could buy 5 loaves of bread, 10 eggs, 3 kg of meat and two bags of candy, now you can buy only 4 loaves of bread, 8 eggs, 2 kg of meat and only one bag of candy, for example.
Depreciation of the national currency — Although this effect is not necessarily felt directly by children, they will certainly hear about the “depreciation of the leu” or how “the euro grows.” You can explain to them that the decrease in purchasing power that we talked about earlier leads to the depreciation of the leu against other currencies. This is because inflation is different in each country, even if it is global, and some countries can control the rate of inflation more than others. And a currency like a euro will always be stronger than a national currency and that is why the leu will always fall much faster than it.
Increasing the reference interest rate and borrowing costs — Although children don’t have much contact with these costs, you can largely explain to them what they entail, especially if you have certain loans or installments and may have to give up other expenses to cover them. cover them. To prevent certain situations, independent financial institutions set a higher than normal reference interest rate.
How do you protect yourself from inflation?
Inflation affects us all, this is clear. Being a macroeconomic phenomenon it has global effects, which last for many years. But some financial and technical tools can help you avoid these effects as much as possible and minimize their effect on your household. Here are some of them, explained so that the little ones can understand them too.
Increasing Income — The most obvious way to avoid losing money is to earn more money. Although this is not available to everyone, there are several options — raising the salary by at least as high as the rate of inflation, developing new sources of income — You can sell certain things online or the little ones can provide certain services appropriate to their age — a lemonade stand, garden work, etc.
Investments — Investments are the most helpful financial instruments when you face inflation. You need to choose an asset class and build a portfolio that will give you a return at least as high as the inflation rate — If you earn from an investment, for example, 5% per year and the inflation rate is 3%, you are largely protected from the phenomenon.
Savings and budgeting — This method does not necessarily help you to avoid inflation as much as possible to minimize its effects — Analyze, together with the little ones, the average basket of goods if you can eliminate things that are not essential to them. There is also the option to buy cheaper versions of the same product without compromising on quality. You just have to be more discriminating with the help you render toward other people.
Financial education — This is the most effective way to protect yourself from inflation and to prepare children for this phenomenon. Financial education helps them to understand all financial instruments and phenomena and develops their right-thinking not only to cope with inflation but also to avoid its effects in advance. Instead of taking momentary measures, guided by panic, they will have a healthy and productive relationship with their finances, being reassured when such macroeconomic phenomena take place that, unfortunately, we cannot control.