By Sam Bocetta
One of the most important skills that parents can pass on to their children is the correct and responsible way to handle money.
Considering how important financial literacy is for navigating life, it’s surprising that it isn’t generally taught in schools. This also makes it all the more important that, as a parent, you impart these crucial life skills. The family environment is also a great one to teach kids about issues—like debt and credit cards—than can be sensitive. Above all, talking about money with your kids from an early age encourages an openness that is one of the most important positive impacts of nuclear families.
It’s never too early to start, either. Kids as young as four years old can start to understand financial concepts. The key is making those lessons age appropriate. Economic education groups are supporting families to teach financial lessons to their children with free advice and resources. This article will look at ways families can teach their children about finances, and how to safely manage money.
Why Financial Education Is Important
Financial literacy is one of the most important skills for building a successful life, but unfortunately, many adults do not possess it. Beth Kobliner, author of the bestselling book Get a Financial Life and a member of the President’s Advisory Council on Financial Capability, points out that the mortgage crisis of recent years shows just how little financial knowledge most Americans have.
This is reflected in the shocking state of personal finance among individual adults in the United States today. Almost half of all Americans are living paycheck-to-paycheck. Only 46 percent of Americans have set aside any money at all for a rainy day fund. The average credit card balance an American carries is over $6,000.
Do you really want your children to make these same mistakes and have financial burdens for the rest of their lives? If you’re like most parents you may respond with a firm no, but you may also argue that schools should teach financial literacy to students instead. Unfortunately, schools and the educational system as a whole aren’t going to do your children any favors either.
As we’ve previously pointed out, the main problem with American education isn’t funding, but rather the topics that schools focus on. Financial education is a huge lacuna in our public school system. This means that if you want your kids to grow up to be successful, you’ll most likely have to teach them yourself or champion financial education at your child’s school.
How Young Is Too Young?
You can start teaching your kids about handling their finances responsibly from a very early age. The key is to make these lessons appropriate to their level of intellectual development. While a three-year-old might not understand the complexities of financial derivatives, they can certainly understand that if you give them $1 they have a choice about which piece of fruit to buy.
The research also indicates that there is a real benefit to starting young when it comes to building good money habits. A child’s money habits can be formed as early as age seven.
How to Teach Your Kids about Finance
The most important principle in teaching your kids about finance is to take it slow, and make your lessons relevant to their everyday lives. This means that your lessons will vary according to how old your kids are.
Below, we’ll take a look at the key lessons you should teach to kids of various ages, and how to do that.
The best lesson to begin with, and one that even many adults still haven’t learned, is this: you have to save and wait to buy something you want.
This is a key lesson for kids to learn at a very young age, and you can begin this process when they are still three years old. Young children can have a problematic association between going into a store and you buying presents for them.
It’s therefore important to point out to them that toys cost money, and that money isn’t unlimited. When you go shopping, you can explain to them that you are in the store for a particular item, and therefore you will not buy them presents.
In addition to this basic lesson, there are some great activities that you can do, even with very young children:
- Create three jars, labelled “saving,” “spending,” and “sharing.” Whenever your kid receives money—even a couple of dollars—they can then decide which jar to put it in. The “spending” jar can be for buying sweets and other small items, and the “sharing” jar is for donations to charities or presents for friends. The “savings” jar is for more important items.
- You can also have your kid set a savings goal, such as to buy a particular toy, just make sure that they are being reasonable with how much they want to save up. They should be able to afford their present in a few weeks, not a year.
As your kids start to grow up, you can build on these lessons. Between the ages of six and ten, you can continue with the “jar system” we’ve explained above, and perhaps start to give them a little more in their allowance. Just make sure that you supervise their savings goals, so that they don’t get over-ambitious and start to have negative associations with savings.
At this age, it’s also important to start to include your kids in your financial decisions, so that they get a taste of what making decisions with money is all about. For instance:
- You can include your kids in small financial decisions, such as buying products online. The average person already spends five hours a week shopping online, so there should be ample regular opportunities in your life for including your children in the buying and shopping process. You can explain that certain products offer better value for money, or the importance of taking advantage of sales.
- You can also start to give your child a little more autonomy at this age. For example, when you need to go shopping for new shoes, you can give your child money and allow them to select the shoes they want within that price range.
Around this age, you can start to shift from short-term savings goals to longer-term goals. By the time they reach 11 years old, most kids will have an appreciation of how long a month is, and can start to conceptualize how long they will have to save up to afford something.
Children around this age can therefore begin to get a basic understanding of how money and finances in the real world work. For example, children around this age can begin to understand concepts such as compound interest, how credit cards work, loans, debt, and income.
A critically important subject that you will want to introduce to a child in this age range is how to keep track of cash flow, in addition to teaching terms such as line of credit, operating cash flow, and working capital.
Another very useful lesson at this age is to teach your kid about compound interest. This might sound complicated for an 11-year-old, but most kids will actually grasp the concept pretty easily. You can also help them by:
- Describing the idea of compound interest with real numbers, and not in the abstract. Research shows that this makes the idea much easier to understand.
- You can also show your child how to do some compound interest calculations on Investor.gov. Here, they can see how much money they will earn if they invest a certain amount and it grows by a certain interest rate.
As your kids approach adulthood, the lessons you pass on can grow more complex. One of the most important discussions to start having with them at this age is about the cost of a college education.
Most colleges offer a “net price calculator” that will allow you to calculate the total cost of going to particular colleges, and you should start to have this discussion by the time your children are in ninth grade. You can compare how much each college costs, what the employment prospects of graduates are, and how much student loan debt could affect your child’s lifestyle after graduation if they attend that college.
Another key lesson for teens, especially as they approach their eighteenth year when they will become an adult, is to start seriously talking about investments, and their long-term financial goals. If you’ve managed to cultivate a habit of saving in them, now is the time to explain how to safely start to invest in the stock market. Stock trading mobile apps such as Robinhood have been great for making investing more accessible to younger people through zero account minimums and commission-free trading.
At this age, you can also start to have discussions with them about the way in which finances impact our society and politics. It’s important to teach your children not just about personal finance, but about how money in our economy works as well.
A great way to kick off your teen’s financial education, whether at home or in the classroom, is FEE’s free webinar, Financial Literacy: What You Need to Know About Money Before 20.
It’s never too early to start your kids on the road to success, and that includes teaching them about money and finances. The family environment is a great one for imparting lessons that your kid’s school overlooks, but also has other advantages.
Talking about money with your kids from a young age will not only give them the habits and knowledge they need to manage this successfully in the future; it will also cultivate an openness that will mean that money is far less likely to be a source of family tension.
Sam Bocetta is a retired defense contractor for the U.S. Navy and a freelance journalist. He specializes in finding solutions to seemingly-impossible ballistics engineering problems. Sam writes independently for a handful of security publications, reporting on trends in international trade, InfoSec, cryptography, cyberwarfare, and cyberdefense.