One of the great disconnects of American society is that we have a capitalist economy yet we send our young people out into the world without a good working knowledge of how finances function. Whether it’s through a desire to shield them from the harsh realities of life or because of a lack of understanding about how to go about educating youngsters about money, we, by and large, are not preparing coming generations for the rigors of investing, credit, mortgages and all the other facets of living in a market-driven environment.
While it would be nice if educating the young about these money matters were made mandatory in all of our nation’s schools – and perhaps, someday, they will be – for now, this introduction to our way of life must begin at home. With that in mind, here are eight important questions on the topic of teaching kids about money.
Is financial literacy for kids really that important?
It is essential for children to learn about money because it will help them live a successful life, secure in the knowledge that they are financially stable and have a genuine respect for the value of the money they earn. In this day and age, children rarely see cash change hands. Their exposure to transactions involves watching mom or dad swipe or click to make a purchase. Because transactions have become so seamless, it is hard to grasp that there is actual money behind that purchase -- money in a bank or on a card that comes with an interest payment. Because of this loss of physical context for money, it is especially important to stress the why of it – that buying things and paying bills is not a magic act.
At what age should parents start teaching kids about money?
If they are old enough to ask for things, then they are old enough to learn about money. A four- or five-year old can learn how money is used, even if it’s not using money directly. For example, when a young child behaves well (displaying basic manners like saying “please” and “thank you”) or completes their assigned tasks (getting dressed for school or giving the pet water) they get a gold star. In these cases, their assigned task is their job and the gold star is currency. They can redeem that star for a favorite snack (simulating the purchase of goods), or save up their stars for a bigger reward (simulating a savings account). As they get bigger, say from ages six to eight, those gold stars can be transitioned to an actual allowance.
How does an allowance contribute to teaching kids about money?
When done correctly, an allowance should mimic the role of having a job and earning every penny the child works for. Once a child earns an allowance they can go to the bank to make deposits in their savings account. They can also use the allowance to buy goods, but always using cash. Determining if they have enough for the purchase, figuring in sales tax, counting money to the cashier, and counting the change they get back are all part of the learning process. It’s also important to stress to them how to allocate their allowance money; a certain percentage to savings, a certain percentage to charity and some for spending. The specific percentages can be worked out with the child, as long as they understand that not everything they have is immediately expendable.
Does a savings account contribute to kids' financial literacy?
This is an aspect of adult life that the child can begin experiencing at an early age. It demonstrates the uses of a bank and allows them to really get the feel for having their own money to deposit. Some particulars to emphasize:
- Printing a balance and showing them how their balance keeps increasing every time they make a deposit is an important teaching tool.
- Watching the balance grow helps explain the concept of interest.
- Learning the physical handling of money, not just debit cards, so that money seems more tangible.
- Learning that an account is a safe place to put the short- and long-term savings.
- Allowing them to build a relationship with a banker that will help them when it comes time to buy a car or, further down the road, a home.
When should some of the more advanced concepts about money (taxes, insurance, stock market) be introduced?
The more advanced concepts should be introduced as kids get to high school age – and they can now be introduced in real-life situations. For instance, when they are learning to drive, they should learn about insurance. When they are thinking about getting a job you should talk about taxes.
What are some good ways to instill financial habits?
- Introduce them to books at an early age that reference finances.
- Parents can open joint bank accounts with a minor and allow the minor to take control of the account with the parent monitoring the activity.
- Open a savings account for a child and have them save coins to later deposit into the account. Have them fill out the deposit slip and count out the money on their own and walk it up to the teller to process.
- Use current and every day events to introduce them to financial concepts. What is going on around you that can be turned into an opportunity to teach kids about money? Politicians discussing tax cuts or increases… a construction project at their school… paying a toll on a highway – all of these can lead to teaching moments about how money works.
How much insight into the family’s financial state should be given, and how realistic a picture should be painted for the child?
In other words, if a parent cries poor every time a kid asks for something, is that sending a wrong message about the family’s financial stability and does it help or hinder teaching kids about money? If the right messages about finances are being sent, then the parent can talk about financial responsibility by using words that are less fear inducing than “poor” and “broke.” Use the child’s requests for things as teaching moments by asking a question in return. For instance, if they ask for a toy, perhaps a parent can respond with something like, “Don’t you already have one of these at home? What is the purpose of having another one? If we get this one, that takes away money that we could use for food or something really important.”
As you know, parental behavior has a huge impact on how the child views the world, so in teaching a child about sound finances, the family should practice the same. And if they aren’t, it would be a good time to start to practice what you preach. That said, even if you live paycheck to paycheck you can share the family financial picture based on common themes:
- It’s the time of month to pay our bills.
- It’s that time of year to do our taxes.
- It’s that time of year to make that contribution to our favorite charity.
- Our air conditioner broke and we have to get a new one. How much do they cost and what are some ways we could pay for it?
- Have your child be in charge of one bill to pay with a check from the parent’s account. They can write out the check and have the parent sign the check. The utility or water bill is a good choice because usage has a direct effect on the size of the bill.
- When it’s time to buy a car, involve children in the process by discussing putting money down, monthly payments, trade ins, interest and the consequences of not making payments.
How does a parent stress the importance of money in our society and how it works without making it seem too important?
By teaching kids about money, budgeting and savings at an early age without being negative about it, you’ll be able to better strike the balance between necessity and obsession. Making a big deal about money in a negative way could get a negative result. That is why positive reinforcement is helpful when children are showing the correct behaviors. Encourage them when they express an interest in wanting to go to the bank or to deposit coins in their piggy bank. Plus, there’s the added benefit that they are improving their math skills!
Remember that while society teaches us how to spend and how to be consumers, it is not always evident to a young mind how those purchases are made. The almost magical nature of the aforementioned swipe-and-click way of transacting business must be revealed to them if they are to avoid a lifetime of financial struggle. We teach our children to do well in school, and to get a good job to make money, but we don’t teach them enough about what to do with that money. Since our ultimate goal is for them to be successful adults, we need financial literacy for our kids in order to give them the tools to become just that.