A gift that all parents should give their offspring is common-sense knowledge about money. Children will benefit for the rest of their lives. Research shows that half of the wealth gap in the U.S. is connected to the vastly different levels of familiarity with financial concepts between the affluent and the poor.
Call it the Financial Competency Domino effect: the earlier a person understands the basics of how money works, the faster will be the accumulation of wealth. People with more assets then learn more because they are motivated to protect and grow their prosperity.
Financial literacy is not a priority of public education systems. Only four states currently require students to complete a stand-alone personal finance course in order to graduate from high school. Just 17 states insist on any personal finance instruction at all. Consequently, many adults feel intimidated by financial subjects and believe that wealth management is too complex for them to deal with. “So many people don’t have the courage or confidence to walk into a bank,” says Susan Beacham, Money Savvy Generation founder and CEO, “so they sign things they don’t understand that derail their financial lives.”
A basic understanding of budgeting can determine the difference between fiscal struggle and comfort later in life. We’ve divided financial lessons into steps based loosely on age groups. Every child develops at a different pace, and yours might not follow this path at exactly the ages listed. Be flexible.
Kids who get a late start may benefit from activities and lessons earmarked for younger ages, and kids who get an early age advantage can jump ahead. Parents decide when to step up to a more sophisticated level. The point is to start early and break away from any preconceived notion that the world of finance is not appropriate for young – even, very young – people.
Step 1 (Early Childhood, Ages 3-4)
When your toddler expresses a desire to get something eye-catching in a store, you explain that:
- Some things cost money (and lots of things don’t)
- We get money by working
- We don’t always get what we want when we want it
- Some of the things we buy are “needs” and others are “wants.” Needs come first.
- Every dollar should be divided into smaller portions for saving, sharing and spending
Teach preschoolers to count and identify written numbers. Count everything (Cheerios, apple slices, toys, rocks), and practice simple addition and subtraction. Later on, move to coin and bill denominations and the relationship coins have to each other and to paper money (ten pennies in a dime, ten dimes to a dollar, etc.).
Use everyday situations to illustrate the relationship between family and money. Talk about money whenever your child sees you in a transaction. Use simple language. Make the effort to pay in cash because at this age a child can’t understand credit and debit. Talk about what it means to work and what you do at your job. Point out other people doing their jobs (drivers, store clerks, teachers).
Show the child what it looks like – literally – to save money. “Kids can’t see through a traditional piggy bank. They don’t know that the money is in there,” explains Beacham. “Put the money in a place that allows them to see it whenever they want.” This is also a great time to introduce the “jar system” along with the savings concept. (Neale Godfrey, president and CEO of Green$treet Commons Inc., provides a jar system how-to here.)
Use four clear jars with lids. Cut a slot in each lid big enough to deposit coins and folded bills. Label the jars Now, Later, Future, and Charity or Spend, Save, Invest and Donate. An alternative is the Money Savvy Pig (read more in the Tools section below).
Step 2 (Elementary, Ages 5-10)
An older child is ready to heap more complex concepts on top of the basics:
- Repeat: Money should be divided into saving, spending and sharing
- Saving should be divided into short-term (saving) and long-term (investing)
- We all have to make choices – sometimes hard ones – with our money
- Anticipating expenses is called budgeting
- How to look for a great deal
- Most of us need money for college but loans can be avoided
- Money in the bank is protected and earns interest
- Invested money can earn greater returns (or it can be lost)
Continue using the jar or chambered bank system. Set tangible, age-appropriate goals to help the child internalize concepts of short-term and long-term saving. Rather than push an agenda to save for college (much too abstract for small children), consider possible needs and wants 10 or 15 years down the road. “Ask, ‘How old will you be in 10 years? What do you think you’ll want? A car, maybe?’ This establishes a reason for why some goals take a week, a year or even longer,” says Beacham.
Compare prices. Look at price tags. Talk about what “expensive” means and when it might be better to pay more rather than bargain-shop. Allow the child to make some choices for family purchases (“This spaghetti sauce or that one?”), and to sometimes be the one who pays (and count the change). At this stage the child still uses only cash.
A lemonade stand is an excellent teaching tool. Pay some of the supply costs with money from the Bank of Mom and Dad. When the lemonade sale ends, split the proceeds in the same ratio as the supply costs were divided: if you paid 20% of the costs, keep 20% of the profits. This illustrates that investors share in profits. The activity touches many other business concepts: inventory, supplies, labor, pricing, marketing and cash management.
Open a bank account. Beacham recommends opening an account in person, allowing the child to give money directly to the teller. “[Children] will understand that there’s a connection between them accumulating the money and the bank safekeeping it,” she explains. Since a child is not likely to earn more than a couple of pennies in interest, emphasize the safety and convenience banks offer, and the fact that banking is a normal, everyday activity.
Children will learn that deposit receipt numbers equal real dollars. Help the child manage the account manually, using a paper ledger to track the balance. Introduce budgeting during holiday or back-to-school shopping. Allow them to make some decisions over how the budget is spent. “Give a finite amount,” says Godfrey, “and if you’re shopping online, include shipping so your child understands the full cost.” Try the Green$treets app (read more in the Tools section below).
Step 3 (Tweens, Ages 11-13)
A pre- or early teen can absorb more complex financial topics, like compounding, as well as the risks inherent to conducting financial business online.
- Once again: Money should be divided into saving, spending and sharing
- Checking and savings accounts
- Different ways to pay for college
- Saving for retirement
- Investing for long-term savings
- Risks of online crime
- Risks and benefits of credit cards
A teen can legally use most adult social networking sites. Talk about online safety and privacy. Teach how to set privacy settings high, and not to share personal details. Never let a child shop online, unsupervised.
Introduce the concept of debit. Open a checking account and help the child to transition from paper ledger to online management of the account.
Talk about credit cards. If you carry a balance, make it a teaching opportunity about responsible use of credit. Show things you purchased along with the interest charges. Try the FamZoo virtual family bank money management system (read more in the Tools section below).
Talk about businesses your child thinks are cool: McDonald’s, Burger King, Starbucks, Apple, the maker of the family car, a favorite clothing brand. “It’s not necessary to show a 10-year-old a price-earnings ratio,” says Godfrey. “Go through the supermarket.
Talk about what you buy, who makes the product, what else do they make?” Let your child choose a stock to “buy” and find out the price of a share. Together, look at the stock’s past performance and keep track for a year.
If you think college loans are inevitable, re-educate yourself. Private colleges can cost less out-of-pocket than public schools with seemingly lower price tags. Grants and scholarships are available, as is income-based financial aid (the more limited the family’s resources, the more funding the student can receive).
Step 4 (Teens, Ages 14-18)
- Sound familiar yet? Money should be divided into saving, spending and sharing.
- Open a Roth IRA with very first job. Match 100% if you can afford it.
- Discuss credit card risk
- Ample savings may avert need for credit card
- Everyone needs a budget
- Start charging for a portion of household bills
- Explain taxes and what they are used for
- Financial advisors
Continue to reinforce all of the earlier lessons. “Help the child open a Roth IRA with that first summer job, and offer to match the earnings in that account,” says Dwight. An account can be opened the first year a child earns income and files a tax return. The income can be from any work, including babysitting and mowing lawns. Parents can fund the account, not just standard employers. The strategy at the heart of this initiative is to teach that a retirement account’s greatest value comes from leaving it to grow over a great number of years.
Impress responsible credit card use before the child is out of the house and beyond your watchful presence. Explain that credit cards are convenience, “for things you want or need and can afford,” says Beacham. Don’t cosign – that makes you responsible for the debt. Instead, encourage use of personal savings to obtain a secured card after the 18th birthday. With the card in hand, review the statement together. Lobby for sparing use and that the balance should be paid off every month.
Teens don’t need to pay rent, but it’s ok to let them contribute towards household internet service, or for their own cell phone. It’s not too early to learn that everyone must anticipate recurring expenses and set aside money for bills. Schedule an office visit with a financial professional and bring the child. Make it fun. Treat it like a field trip. The experience can make your child feel very adult. The lesson’s goal is that to get results, careful planning and periodic goal reviews include having a solid financial team at your back.
Step 5 (Young Adults, Ages 19 and Older)
- Never let them forget: Money should be divided into saving, spending and sharing.
- Maintain an emergency fund
- Credit cards are convenient and can help build good credit
- Practice responsible credit card use
- Insurance – why and when needed
- Debt eats money; spend within your means
- Make goals – save for house, car, travel
- Charge (and increase the amount) for house bills if child still lives at home
Your young adult can now learn about more abstract concepts, like why we need insurance and what types of insurance are appropriate for different people and under different circumstances. Discuss medical insurance and the potential for financial devastation without it, even if your child will stay on your plan for a while longer.
You might also have disability insurance (sometimes paid by the employer), worker’s compensation insurance, life insurance, business liability insurance or other types of insurance. Talk about what those policies cover and why they are needed. At this juncture, a child should understand what goes into a credit score and how to build credit security. It should be clear that an emergency fund supersedes the need to use a credit card. To use the card responsibly, the child needs to practice with, not avoid it. “Use it, pay it off, use it, pay it off,” says Godfrey.
Talk about borrowed money and when to avoid loans. For example, the child ought to drive a used car that’s paid for. Keep asking about finances, even as this young adult’s financial life becomes totally independent from your own. Your child may reach sufficient age and maturity to balk about the prying questions from concerned parents, but that should not be the impetus to close the door on communications.
When your child lands a job in a company that offers a 401(k) match, encourage a contribution at least large enough to get the full match. “One of the easiest ways to build good habits is to automate them,” says Dwight. Step up retirement savings goals to include long-term care.
What You Should Do
Consider your own financial education. Look back. What did you learn? What passed you by? How did events in your life emphasize the most important points about money management? When did you know that money earns money? Who in your family worked into old age? Make the case even if you don’t “qualify”. It’s okay to teach children to avoid debt even if you have debt. Become your own Best/Worst example.
Talk, talk, talk about money and finance. “How many times did you have to brush your kids’ teeth before they could handle it on their own? This is the same,” explains Beacham. Allow the child to experience losses. If you lose your job or the transmission falls out of the car, cut back or eliminate the allowance. Everyone in the family works together to meet the revised financial needs. Life throws curve balls and none of us is insulated.
Teach what it means to invest. It’s not an activity reserved for the wealthy. Money in a savings account nowadays loses money because inflation outpaces earnings. If investing fills you with unease, reach out to a certified financial planner, registered investment advisor or other licensed and qualified financial professional.
Simplify your behaviors and demonstrate what you want your child to emulate. If possible, suspend the convenience of mobile and direct deposit for a while so that the child sees you put money in the bank. “A teen can understand a mobile deposit, but a young child can’t understand that the digits on the paper check you just snapped a photo of turns into money in your account in the bank branch downtown,” says Beacham. Try to associate purchases with hard cash. Don’t let stuff just show up at your house a couple of days after you click on it.
At every age, discuss charity and that some people have much less than you do. Help the child experience giving, not just by handing money over but by volunteering time for a worthy cause. Donate a minimum number of hours every month. Judge when to move on to the next level. Every money lesson is teachable using age-appropriate language and activities. “Watch, listen, look, guess, try. Backpedal if needed,” advises Beacham.
What Not To Do
Don’t rely on instructions alone to relay money concepts. Give kids ample opportunity to practice, practice, practice. Daily. Telling a child about the value of compound interest is nothing compared to letting them see their own money actually grow. Keep clear of complex concepts, like stock picking. It won’t sink in. Fall back on conversation. Give examples. Show more, less tell.
Don’t bail out the child. It’s hard to watch suffering, most especially when you can afford to make it right. But life happens and children need to learn that. Lessons are best taught by experience, whether it’s doing more research before making a purchase, learning how to avoid a scammer, or learning how not to lose money outright.
Lots of tools and resources are available to help parents navigate kids’ financial education. Game and activity ideas are shared in abundance online. Here are our favorite systems; experiment with others and please tell us about your experience.
The Money Savvy Pig
The Money Savvy Pig is a four-chambered translucent piggy bank. Children very early on develop the habit of setting aside money for short-term savings, long-term savings, charity and spending money. The bank is see-through so the child can watch the balances grow.
The Money Savvy Pig is used alone or as part of a larger financial education program taught by a teacher or parent. Lessons and materials on msgen.com cover every money topic from coin and currency identification to investing.
Green$treets is a very parent-friendly iOS app for kids. It is the brainchild of Neale Godfrey, author of the New York Times #1 best seller Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children, and many other books on financial literacy.
In the game, kids perform tasks – like cleaning up the garden (using a Ninja Fruit-style slicer) and cleaning up the tree house (using an Angry Birds-style catapult). They earn money to save and care for endangered animals and in the process learn goal setting, budgeting, saving, spending and giving.
The app sends emails (and short voice messages recorded by the player) to the adults in the player’s life who want to share and keep tabs on the child’s fun and progress. One version of the app allows the adult to make real contributions to Heifer International in amounts that correspond to the amount the child donates in the game. Additional resources for parents, grandparents and teachers are found on the website as well.
FamZoo is a virtual family bank. Parents set up a “banking” system wherein kids learn good money habits through real-life, hands-on practice. Children learn earning, saving, spending and giving through the use of an IOU account, a prepaid debit card or a combination of the two. IOU accounts track the money, but you handle the actual cash yourself. They are a nice companion to paper ledgers when your child first starts learning about tracking balances.
The prepaid debit cards work like any other. Account management is made easy through a user-friendly dashboard, and parents have full access to their children’s’ accounts. In both systems, parents can automate allowances, pay rewards for chores or jobs, withhold a portion of the child’s pay for saving or charity, impose monetary penalties, charge for expenses and more.
Among FamZoo’s many clever teaching tools is the ability to pay (and automate) interest on savings balances at whatever rate the parent sets. This allows a parent to demonstrate compounding and growth in a fraction of the time it would take a real bank savings account. More information and a FAQ may be found at the website.
Whether to give an allowance, how much, and under what circumstances are decisions each family must make independently. That said, an allowance can be an effective teaching tool. Managing regular income is a critical life skill, and kids should practice saving and investing from a very young age. Experts differ on whether to tie allowance to work (chores) or grades. They all agree, however, that certain behaviors should be expected of everyone in the household, like brushing teeth and tidying up. Godfrey offers guidance here.
Additional Helpful Resources
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