Teaching Financial Literacy to Children

In today's complex financial landscape, it is crucial for children and teenagers to develop a strong foundation in personal finance. By equipping them with the knowledge and skills to make sound financial decisions, parents and teachers can empower young people for a successful financial future. ?For years, I’ve had clients ask, “why don’t they teach this in high school?” when discussing common financial situations that most people must cope with. There is certainly a disconnect between what is taught to children (and teenagers) about finance, and what skills they need navigating insurance, investments, budgeting, work benefits and other real-world topics.

Below I discuss some effective strategies for teaching and discussing personal finance with young people, emphasizing the importance of open communication, relevant topics, instilling good habits, and addressing existing educational gaps.

The Role of Communication

To effectively teach personal finance, adults should prioritize open and ongoing communication. Create a supportive environment where children feel comfortable asking questions and discussing money matters. Encourage dialogue about financial concepts and share personal experiences to make it relatable. Regularly engage in conversations about money management, savings, and budgeting to normalize financial discussions. The reality is that most adults don’t discuss financial topics with children, so just explaining your thought process about why certain items can’t be purchased this month, or why budgeting is important goes a long way to helping kids understand good habits.

Essential Topics to Cover

Budgeting and Saving: Teach children the importance of creating a budget and sticking to it. Encourage them to allocate money for different purposes and emphasize the significance of saving for short-term goals and emergencies. If they get an allowance, encouraging the use of an envelope system, where money is “assigned” to different buckets each month.

Banking and Saving Accounts: Introduce children to the basics of banking, including the purpose of savings accounts, interest rates, and the benefits of compound interest. My favorite example to use for compound interest is candy. Would you rather have one piece of candy now? Or two pieces of candy later? What about three pieces? While most kids aren’t good with impulse control, at least introducing the concept of compounding shows them the benefit of saving money.

Earning and Income: Discuss various ways to earn money, such as part-time jobs, chores, or entrepreneurial ventures. Teach children the value of hard work, responsibility, and the concept of earning an income. Let them pitch their business idea to you Shark-tank style to discuss responsible use of money. In addition, teach them about your career and how you earn money, and how it helps support the household.

Debt and Credit: Educate teenagers about responsible borrowing, the pros and cons of credit cards, and the importance of maintaining a good credit score. Explain how their ability to afford a house later in their life is directly influenced by the decisions they make with their credit now.

Investments and Long-Term Planning: Introduce the concept of investments and the potential for growth over time. Teach children about stocks, bonds, and other types of investments to help them understand long-term financial planning.

Instilling Good Financial Habits

Lead by Example: Parents should demonstrate responsible financial behaviors themselves. Display good habits like budgeting, saving, and making informed purchasing decisions.

Allowance and Chores: If possible, provide children with an allowance to teach them the value of money. Even if you can’t afford much, use quarters, or loose change to help build the link between money and responsibility. Encourage them to earn extra money by completing age-appropriate chores, fostering a sense of responsibility and work ethic.

Goal Setting: Help children set financial goals and create a plan to achieve them. It could be saving for a toy, a special outing, or a long-term goal like college education.

Delayed Gratification: Teach children the importance of delayed gratification by encouraging them to save for bigger purchases instead of instant gratification. This instills patience and a sense of financial discipline.

Addressing Educational Gaps

Despite the importance of financial literacy, there are notable gaps in education for younger individuals. These gaps are starting to be addressed by some public universities, but many kids and teenagers still learn virtually nothing about how to manage their finances during their primary education. To bridge these gaps, adults can:

Advocate for Financial Education: Encourage schools to incorporate personal finance into their curriculum, emphasizing the practical skills and knowledge children need to navigate the financial world.

Use Online Resources: Utilize reputable online resources and interactive tools specifically designed to teach personal finance to children and teenagers. Many websites offer engaging games, tutorials, and educational content.

Enlist Professional Help: Consider seeking assistance from Certified Financial Planners (CFP?) or educators who specialize in teaching personal finance to young individuals. They can provide tailored guidance and support.