Invest in Investment - Financial Literacy for Kids

Financial literacy is one of the key ingredients for financial success in adulthood (source). As an economist and mother, it is my duty to educate my children about the world of finance. In this article I will share how I have taught my then 5-year-old and my then 7-year-old about money - so you can do it too.

But first, let me explain why I spent my time off work last summer teaching my kids about money rather than buying them ice cream.

Beyond saving and household sums

As a mother of two daughters, it is especially urgent to invest in the financial literacy of my children per the quote below.

The way I was taught about money from my mother and grandmothers reflects the reality described in this quote accurately. I was taught to manage a household and create savings. Not to invest or build wealth.

It took me five years at university and a boss that gave me responsibility to investing the company's CSR funds to unleash my love for investing. It made me realize that no amount of saving or cutting costs is going to produce the same outcomes as financial investments. I was a careful and dutiful young woman financially. I want my children to be able to evaluate and take financial risk at a much earlier age than I.

Picking a summer for money school

Last summer we doubled down on financial education for our children. My oldest daughter was then 7 years old and my youngest just 5. I felt it was time to talk about money, because they had both started asking for things and exchanging Pokémon cards at school.

For me that meant that they were already engaging in financial transactions - and needed to learn more about the world they were already in. It helped that they already knew their numbers and could add and substract. If your kids can't do that yet - I would suggest doubling down on these skills before taking on the more abstract concept of money.

Does it have to be a summer? For me learning about money takes a focused effort, and in my current employment situation that sort of effort only comes during vacations. You may not need a summer to have focus. I did.

Here is the curriculum we identified as part of the money school:

As a reward for going through the curriculum, we promised our children that we would start paying them pocket money after they mastered all the steps.

The curriculum starts with the basic concepts, moves into more applied concepts and ends with an investment tool. I'll share more information on each of these for your inspiration.

But before we start the curriculum, I want to address an important question my youngest asked me:

"Mummy, what is money?"

Money is what makes the lollipop factory go around

We were in a summer house at the North Sea in Denmark the day we started money school. We went for a stroll in a nearby village, where touristy shops sold sweats and ice cream. Both kids wanted gigantic lollipops. We did not get them, but that was the freshest example of a potential purchase on my mind that evening, when we started taking about money and my youngest asked what they are.

I explained:

Money are a way for people to make trades. As people, we have agreed that pieces of paper and coins can be used to make trades instead of trading things directly.

Using Pokémon cards as an example, I explained that we use money to "trade" for a pack of cards at the shop, but at school my oldest trades cards of a certain value to other cards.

My oldest thought about that for a while, and we talked through some of the trades she had made in the past month. She has a preference for any kind of glittery card no matter how much power it would have in an actual battle.

She then asked me:

"Mummy, how do we agree on what things should cost?"

This is how we got into the business of lollipops:

In a lollipop factory you have three key ingredients:

1. Sugar
2. Water
3. Colour

These ingredients are handled by the jolly-looking workers inside the factory. They are then transported to the shop in the van with lights on, and sold at the shop that we passed by that day.

All of these activities cost something. Someone made the sugar. Someone pumped the water. Someone made the colour. The workers in the factory need a wage to work their. The van needs a driver and gas. The shop keeper needs to pay rent and hire someone to man the shop.

All of these costs put together determine how much the shop would charge for a lollipop.

We talked through the case in reverse order in terms of trades. How the child purchasing the lollipop trades their money for the lollipop. How the shopkeeper trades money for the time the shop attendant spends in the shop and all the way back to how the factory trades money for the bags of sugar that are delivered in their warehouse.

The girls agreed that they would be willing to work in a lollipop factory for free, so that children would not need to pay a lot of money for them. I put a pin in the conversation about opportunity costs of time for when they are older.

Currency - and the importance of physical money

Once we more or less settled on what money is, we started diving into learning about money itself. I have not used paper money since the last time I had to take a cab in Germany - and the driver had to drive me by an ATM to get paid. But for children, understanding the concept of currency as it is in your society is important as a concept.

We invested in a playset of money in our local currency - the Danish Krone (DKK).

This allowed us to examine all the different kinds of coins and notes currently in rotation, but without having to withdraw extravagant sums from our accounts.

We used the set to ask the kids to do these types of exercises:

1. Take a 50DKK note. Pick the coins that can also make a 50.
2. Take a 500DKK note. Pick the notes that can make 500.
3. How big a stack of 2DKK coins do you need to make a 20DKK, compared to a stack of 5DKK coins?

These led to great reflections from the kids. Like why there is no 3DKK coin and why the coins are different colours.

I attempted to explain the concept of foreign currency - especially the Euro, the Pound and the US Dollar. But this got a bit too abstract for my kids at the time, and we compromised on calling the playset "Danish money" and that there is something called "Other money". Another battle for another day.

But now we had two key learnings under our belt:

• What is money
• What is currency

Guess what things cost

We were driving home from a geological museum. Both kids were hugging brand new dino teddy bears from the museum gift shop. I asked the kids:

How much did we pay for your teddy bear?

I got a guess of 10DKK and one of 1000 DKK. Then I asked:

How much do you think our car cost?

Once again, I got a pretty wide range of responses. We clearly had work to do on narrowing the ball park of what things should cost. We started out with items important to the children. Below is an example of a doll vs. a doll house. (note that one of the guesses is infinity ;)

We started out asking about whether it was closer to 10DKK or to 1000DKK. Not really getting any better with hypothetical examples, we decided to double down on empirical practice.

Instead, we started creating a daily shopping list for the children. Here is the process:

1. Each child would get a list with 5 typical household items for each of them. The items were hand drawn by me, since the little one couldn't read yet.
2. For each item, they would need to guess what it costs.
3. Then they would need to pick the item up at the shop itself, and note down what the actual price was.
4. Back at the summer house we would look at the difference between their estimate and their guess
5. They would lay out the cost of each item in coins and notes from their play set to make it tangible
6. We would sum up all 5 items and talk about what else they could get for the same amount of money in terms of Pokémon cards and dolls
7. We would have a conversation about what they were assuming about the price of items relative to each other, and what they learned from their experience

No evidence survived from these 8 days of shopping lists and calibration. It did wonders for the kids understanding of costs, and to this day they can tell me the range of egg prices depending on which supermarket we shop at.

Here is an illustration though, so that you can make your own list for your child:

But this exercise drove me completely mental around day 5. Our shopping trips changed from being brief transactional affairs to being study sessions that sometimes took hours. We studied paper towel brands and yoghurt price ranges. We hung out among cabbage pencil in hand. Other shoppers were passing by with wonder in their eyes.

I was ready to quit. Luckily my husband was steadfast, and managed to complete the training with the kids until their variance fell below 5%.

Ownership in the purse

Once the kids had got a hang of what stuff more or less costs, we wanted them to start paying for things at the counter themselves. This meant that they needed to be able to asses whether they have received the accurate change or not. Given our training with coins and notes, I expected this to be easy. And the math part was indeed easy.

But this led us to discuss another important concept of money: Ownership.

Even though the kids could accurately divide a 100-note into four piles of 25DKK coins, it was tricky to identify which piles would belong to whom once the transaction was over.

I tried explaining the concept with the lollipop factory again, explaining at each step who owns the lollipop. My supply chain colleagues would be proud of my order-to-cash explanation. But it did not resonate at all with the kids.

Instead we ended up simplifying it to this degree:

You own your money. And should only exchange it for items of equal value.

And to further define "your" money, we agreed that it had to be the money currently in the purse of the child in question.

I explicitly told the kids never to give their money to anyone, unless they get something in return that they actually want - and that is the same value as what they pay for it. Recalling my own childhood experience of giving money to a school bully.

This led to philosophical reflections from my older daughter about some of the Pokémon trades that she has made at school, realizing that she was not forced to make them, since the cards were in her "purse".

We went purse shopping with the kids later that day and each of them found one that they would keep as their "ownership vault".

I must say that since then, they have purchased additional purses. Which purse defines ownership now is an inflated concept.

Spending pocket money

Having completed the money school that summer, my kids now receive a monthly allowance. The agreement is that no parent can decide what that money is spent on - hence the inflation of purses above. But we do ask the girls to follow a process for thinking about what they buy.

We call it the Spend Board

It's a clip board, where the girls can write up their wildest dreams of what to spend their money on, but also keep track of the money currently in their possession. There are no norms for good or bad - it is just a tool for transparency.

So far 9 month have passed and the kids are acting naturally in the world of money. Managing money is part of their repertoire and they have a heightened understanding of value and equal transactions. Also when it comes to trading Pokémon cards.

I am happy that we invested last summer in heightening their financial understanding and managed to find ways to explain complex terms.

It gives them financial confidence to wield money.

And that is what will lead them to take larger risks with their finances as they grow up. And learn from their mistakes. I can't wait to teach them the next thing in their zone of proximal development - and hope to have inspired you to start the financial literacy journey with your kids.