For the financially savvy, money lessons may seem like common sense, and teaching kids the basics isn’t a big deal. Others may avoid discussing financial management with children because they don’t feel comfortable with the topic or prefer to leave education matters to the schools. Unfortunately, this means some children grow up not knowing how to manage their money.
The good news is you don’t have to be an expert to teach financial literacy for kids. You can give them a basic foundation for financial success by incorporating money-related discussions and experiences in their daily lives.
- Why Is Financial Literacy Important for Kids?
- What Does Financial Literacy Include?
- How Do You Teach Kids About Finances?
- Should Kids Get an Allowance?
- Why Is There No Financial Education in Schools?
Teaching kids financial literacy helps them establish habits and beliefs they need to successfully manage their money. It prepares them to know how to deal with recurring expenses, save money for emergencies and even plan for retirement.
When young people understand concepts such as interest and credit, they’re better prepared to make major financial decisions later in life. Without financial literacy lessons, children may have to learn the hard way when it comes to handling money properly.
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The Federal Deposit Insurance Corporation offers a series of lessons on financial literacy designed for students in grades six, seven and eight. These lessons cover the following themes related to money:
- Save and Invest
These themes align with the five money management principles promoted by the Financial Literacy and Education Commission. This commission, established by Congress, offers resources, hints and tips parents and teachers can use to educate children on topics such as understanding a paycheck, saving for long- and short-term purchases and shopping for a loan. Other principles to consider include:
- Establishing savings habits
- Tracking spending, savings and investments
- Protecting identity
- Choosing insurance
- Comparing prices
- Creating a budget
- Investing in education
- Saving for retirement
When it comes to teaching kids about finances, there’s no single way that works every time. Some people enroll their children in formal classes. Others opt for a family-friendly program they can work through at home. Parents also may choose to create real-world experiences that give their children chances to learn about money.
Some parents mistakenly believe that money discussions are not appropriate for young children. This couldn’t be further from the truth. Personal finance is not something we learn overnight. It takes years to develop good money management skills and learn to save. And while you wouldn’t discuss heavier topics with young children, there are plenty of age-appropriate ways and activities to incorporate personal finance in family discussions.
Your children are watching the way you handle your own finances. That’s why it’s important to model smart money habits in front of them. Show them how you budget your money and decide where to spend it. This can be as simple as explaining how you choose what to buy in the grocery store and then clipping coupons or reviewing sales ads before making a shopping list.
It’s tempting for kids — and adults — to spend their money as soon as they receive it, which means learning how to save is an important financial literacy skill.
Help your children establish a habit of saving by giving them a piggy bank or opening a savings account where they can keep their money safe until they want to use it. For example, if your child wants a new bike, you can use it as an opportunity to talk about planning for big purchases by setting savings goals.
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As children get older, they can start learning the difference between short- and long-term goals, opening the door to discussions about how interest works. Explain the concept of interest using simple, specific terms. Then, allow your children to explore interest calculators to help them learn how time and interest rates affect how much they can make by leaving their money in a savings account.
The teen years provide additional opportunities to reinforce financial lessons, especially as youths start earning money at part-time jobs. When your child’s first paycheck arrives, review concepts such as withholding and taxes. Also, discuss the benefits of creating and using a budget, and invite them to see you paying household bills. You may even ask your children to start paying for some of their own expenses, such as their cellphone bill or gas allowance.
This is also a good time to talk to your children about how credit works and why it’s important to have a good credit score. You can use a prepaid credit card or debit card in place of an actual credit card. Let them use the card to complete purchases, but set a maximum limit they can spend. If they cannot pay back what they spend, suspend the card and take it away until the full balance is paid.
Giving children an allowance — especially when they earn money by doing chores around the house — is one tool for teaching money management. An allowance provides an opportunity to establish the relationship between work and wages and can encourage some children to find ways to make extra money. It also allows children to make — and learn from — financial mistakes.
For younger children, having cash in hand helps them truly understand the value of a dollar. Older children can begin experimenting with digital banking through allowance apps that simulate the online banking systems adults use.
It’s also possible to teach financial literacy without allowances. In fact, kids who receive an allowance — even in exchange for doing chores around the house — don’t automatically learn how to manage their money. Parents still need to talk to their children about money and finance, including conversations about deciding what to spend money on and how banks work. It is also important to model strategies such as how to economize and how to save for major purchases.
Many reasons exist for excluding financial education classes from schools. States that do offer personal finance courses typically do so because the course is a graduation requirement. Even in those states, the quality of the classes can vary. Schools may not be able to find qualified instructors to teach the courses. They also may choose to focus attention and resources only on standards assessed on state exams, which can result in financial knowledge gaps.
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This article has been updated with additional reporting since its original publication.