Teaching financial literacy to children is an important skill that can help them achieve lifelong success. Providing a good example by paying bills on time, creating savings accounts, and giving to charity are great ways to teach kids about money values.
Parents are the best teachers for their children when it comes to financial matters. They can begin by using age-appropriate lessons to explain how money works, like balancing needs and wants and deciding between risky investments and debt management.
1. Understand the Value of Money
Understanding the value of money is one of the foundational skills for financial literacy. It’s the knowledge that helps kids balance needs against wants, track expenses, save and invest wisely, manage debt and evaluate risks in credit or investment products.
While houses, office buildings, land and works of art also store value, money stands apart from these commodities in its ability to be exchangeable for other items or services. It’s convenient to carry, recognized as legitimate by all, physically long-lasting and has a stable value.
In recent years, educators, financial professionals and social change activists have encouraged children to become more financially literate, with numerous classes, camps and activities to nourish this skill. But what does it mean to be financially literate?
While kids may learn much about money through their weekly allowances and real-life shopping trips, a primary way they develop this skill is by watching and learning from their parents. “If they see you slap plastic down at the grocery store or spend money on entertainment without thinking about your financial future, they’re going to mimic those possibly bad habits,” says Ramirez. “So it’s important to have open and honest conversations about money with your kids.” Moreover, it’s a great idea to include financial literacy in family game night or screen time to reinforce these lessons on a regular basis. You can also use games like Monopoly Junior, Pay Day and The Game of Life to help kids understand the principles behind investing and spending over the long haul.
2. Develop a Savings Plan
Financial literacy includes a broad range of skills that help people manage their money. This can include things like budgeting, planning for retirement, managing debt, and saving. These skills are not only important for individuals, but they also have a positive impact on the economy as a whole. For example, the 2008 financial crisis was a result of low levels of financial literacy, which contributed to people getting into trouble with their credit.
One way to help children learn the value of saving is by encouraging them to think about what their needs are versus what their wants are. Help them understand that needs include food, shelter, basic clothing, healthcare, and education. Wants are the extras such as movie tickets, candy, or a new bicycle.
Another great way to teach children the importance of saving is by encouraging them to compare prices before purchasing items. This can be done by visiting multiple stores in person or searching online for the best deals. This helps kids learn that spending wisely can help them save for a future goal, such as a new computer or a vacation.
JA has many resources available to help educators implement financial literacy lessons in the classroom. These resources range from lesson plans and interactives to virtual activities. For example, the lesson Plan, Save, Succeed! teaches middle school students about budgeting, income, savings and interest.
3. Develop a Budget
You may have experienced the negative effects of poor money management at some point in your life, whether it’s falling behind on rent payments or racking up credit card debt. You can help your kids avoid those pitfalls by teaching them the basics of financial literacy.
This includes understanding the difference between needs and wants, as well as establishing savings goals for long-term expenses such as college. Teaching your children how to categorize their spending will give them a sense of control over their finances. It can be as simple as helping them to separate their allowance into “save,” “spend,” and “share” categories, or it could involve a more involved method such as using a budgeting app or the cash envelope approach.
It’s also important to teach your children how to set aside money for savings, no matter their age. A piggy bank may work for the youngest children, while a savings account is appropriate as they get older. Another option is to have them set up a monthly or weekly money goal and encourage them to meet it by tracking their progress on a saving chart.
You might already be doing something similar for your child’s physical health by encouraging annual check-ups, but consider adding an annual money check-up to your list of family priorities. By regularly checking in with your children about their financial health, you can help them develop a mindful relationship with money that lasts a lifetime.
4. Develop a Spending Plan
Developing a spending plan is a key part of financial literacy. This is because it helps children understand how much money they have and how it is being spent. It also encourages them to make smart decisions about their spending, such as focusing on needs first and then wants.
This can be done by having them track their income and expenses using a notebook, spreadsheet, or budgeting app. Getting kids into the habit of tracking their spending is an important step toward building good financial habits that will last throughout their lives.
Another way to help kids develop a spending plan is to encourage them to save their allowance and/or earnings for something they really want, rather than simply buying things as the mood strikes. This teaches them the value of saving and can help prevent them from falling into debt problems later in life, as they are more likely to be able to afford the things they truly want instead of a few impulsive purchases here and there.
Finally, one of the best ways to teach kids a spending plan is by having them use some of their money to help those in need. This can be done by encouraging them to donate a portion of their allowance or savings to a charity or non-profit organization. Alternatively, it can be as simple as having them volunteer for a local cause that is close to their hearts.
5. Develop a Savings Account
Developing savings habits is one of the most important skills you can teach your children. Encourage them to save money from their allowance, and show them how to keep track of their balance in a clear jar or other container. Explain that they should spend their money on needs before wants, and that their savings will help them buy things like a new video game or a new tablet later.
If your kids are old enough, you can also open a custodial bank account in their name. This will help them learn about banking basics and how interest works. It’s also a great way to teach them about budgeting and how to make smart decisions about spending, saving and even donating to charity.
Similarly, you can help them develop earning skills by encouraging them to earn additional money from things like selling items at garage sales, operating a lemonade stand, or helping with the family dog walking business. You can even offer to match their savings dollar for dollar, which will help them feel more invested in the process and see how long it takes to save up for a big purchase. This strategy can be especially effective if you can find a high-yield savings account for your kids, which will allow them to see the effects of their hard work more quickly. It’s easy to compare high-yield savings accounts online with sites like Credible.
6. Develop a Credit Card
Credit cards are a great way to teach children the ins and outs of spending responsibly. They will learn that they are not buying things for free, and that they will ultimately be required to pay back the amount they charge – plus interest. You may also want to consider adding your child as an authorized user on a card that you own, so they can have a hands-on experience with the real world and see how their choices impact them.
When used wisely, a credit card can be a very helpful tool for kids to have in emergencies or to help them build their credit. However, if not used wisely, a credit card can quickly lead to serious trouble that can be hard to recover from. Select spoke with Sheehan, who suggests that parents incentivize saving rather than spending and that they model responsible behavior when using a card (which will translate into how they behave with their own credit cards as adults).
Most minors are not yet ready to get a credit card in their own name, but there are ways to help them prepare for the future. For example, Greenlight offers a prepaid debit card for kids and teens that helps them learn responsibility by managing their money. You can load their card with their weekly allowance payments, the money they earn from a summer or after-school job, or even financial gifts from friends and family. In addition to providing features and controls, the Greenlight app also helps spark conversations around finances and allows parents to monitor their child’s account activity.
