Teaching Your Kids about Financial Literacy

With schools being closed under the stay-at-home restrictions for the foreseeable future and the “new normal” being that kids are doing their schoolwork at home, it’s understandable that parents are stressing about being cooped up with bored and anxious kids. In addition to finding new board games and letting them play Fortnite all day, why not take this opportunity to share some knowledge with your children about financial literacy? 

Along with teaching the next generation how to manage their money, it’s just as important for them to understand why. Financial literacy for kids is the knowledge, skills, and motivation that will best prepare them to achieve their personal financial and life goals. So where do we start? When dealing with financial literacy for kids, you need to start with the basics.

We know that kids can be sponges of information, soaking in all that they see and learn from their parents. The question is, what are we teaching our kids about financial habits? Or rather, what examples are we setting for them by way of our own financial behaviors?

Financial Literacy Month is an annual event that focuses on improving Americans' understanding of financial principles and practices. Given how important financial skills are to navigating life, it’s surprising that our schools don’t teach children about money, starting at a young age. 

The New York Times bestselling author Beth Kobliner says children as young as three years old can grasp financial concepts like saving and spending.  And a report by researchers at the University of Cambridge revealed that kids’ money habits are formed by age 7. 

Here are some basic financial lessons for our children that will be of great use to them as they grow: 

Lesson 1: Need vs Want

“I want it. I want it now!” This sounds like a child aged 3-5. It could also accurately describe the behavior of some adults who never learned this lesson. Creating a clear distinction between “needs” and “wants” is a great way to prepare our kids for a responsible financial life, as they grow older. 

Everyone needs food, clothing, shelter, and transportation, but while food is a need, eating out every night is a want. Clothes are a need, but the latest designer clothing is a want. That doesn’t mean that you can never go out to eat or purchase a pair of designer jeans, and a great way to teach your children the difference between needs and wants is through back-to-school shopping. 

Now that we’re finding ways to do things from home, consider letting your kids do their own shopping online. This can be a group activity of course but think of it as the virtual version of dropping them off at the mall with a universal gift card preloaded with their budget and a list of items that they need. Let them make difficult decisions when it comes to limited resources and unlimited options. Your child will either impress you with their ability to stretch a dollar, or you will have to make some exchanges or cancel some orders. Either way, it’s a learning experience all around.

Lesson 2: Make good choices with your money

As your children grow to about 6-8, they’ll need to wrap their heads around the age-old “money doesn’t grow on trees” concept. Money is finite, and it is important to make wise choices of how you manage, save, and spend your money. 

This also translates into teaching your children that once they spend the money they have, they will have to earn more. In other words, they shouldn’t buy on credit and amass debt. This, in turn, opens the door to another important lesson — income (minus) expenses better equal a positive number. 

Lesson 3: Saving and interest

At around age 11-13, children’s financial education can shift from short-term saving goals to more long-term savings. They have high school and then college ahead of them. Introducing the idea of a savings account and compound interest (when you earn interest on your savings, as well as on past interest from your savings) would be a good thing to teach them. 

You can put that knowledge into practice by opening a children’s savings account. Do a search online for “bank account for kids” to find the top children’s savings accounts. Always read the fine print about fees and minimums before opening an account. Once the account is open and funded, review the monthly statements with your child, and show them how the interest grows over time.

Speaking of interest — while you should teach your child there is no such thing as good debt, you should emphasize the many uses of credit. Credit is a tool that shouldn’t be abused. It’s not for running rampant at the mall or on Amazon to buy things that will impress your friends. If used responsibly, it can help you put a roof over your head, provide transportation, or possibly fund higher education, such as college or trade school—both of which could lead to higher income potential.  

Most people learn the dangers of debt the hard way, but you can pass down hard-won knowledge to your child. Explain to your kids that credit is not their money. It’s a loan they must be paid back — and here’s the important part — with interest. The longer it takes for them to pay it back, the more it will cost them. If your child understands all of that, they can avoid becoming another statistic.

 

 

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Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

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David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.