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PEP Blog

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Financial Literacy Essentials for Kids

By Bridget G. Edwards

We want the best for our children, which doesn’t necessarily mean we want them to have the most expensive material things. What it likely means is that we want them secure, safe and well balanced. We hope to lay a good foundation on which they can build as they grow into adulthood. Money – and learning to manage it responsibly – will impact whether they will be successful as adults.

Don’t be Afraid to Talk – About Money!

Although money is central to transacting everyday life, plenty of parents aren’t helping their kids understand the basics. What we eat, where we live, what we wear, the car we drive, health care, education, gift-giving, entertainment, utilities, insurance, childcare – you name it, it’s all about money.

In a survey conducted by T. Rowe Price (11th Annual Parents, Kids & Money Survey) results showed that almost 50% of parents said they miss out on opportunities to talk with their kids about money and finances. About 25% said they are very reluctant or extremely reluctant to discuss financial topics with their kids. On the other hand, kids want their parents to share information.

When I was growing up, I experienced that same silence from my parents. Although I had an allowance and a joint savings account with them (which they controlled), I never fully understood the process. Thankfully, I had a Life Skills class in my junior year of high school in which I learned some basic principles. But it wasn’t until I was engaged to be married at the age of 22, that my mother decided to explain about writing and justifying checks in a checking account. Better late than never!

Be sure that kids will learn lessons about money one way or another, even if you’re not teaching them. Playing a key role in shaping our kids’ thinking, values and feelings about money is an essential gift. Here are some suggestions:

Start With the Basics at a Young Age

Through the storybook character, Sammy Rabbit, co-creator, Sam Renick has been instructing kids about money since 2001. From his viewpoint, the earlier you start a child’s financial education process, the better. Renick says lessons can begin before age 7, because research shows that money habits and attitudes are already formed by then.

Writer Miguel Hughes has observed, “Once your kids are old enough to know they shouldn’t be sticking pennies in their mouths, you should introduce them to coins and cash.

It’s time to explain what money is, how it is used and showing them how money works. Let your kids see you making purchases with cash.

When you pay with debit or with credit cards, it’s ok to explain to your kids that you’re using your money to make purchases. Chase Peckham, director of community outreach for a financial literacy center in San Diego, California, said he shared his receipts with the amount he paid with his preschool-age son and daughter when they shopped together. “By doing it over and over again, it became habit to them,” he says. “As they got older, they started to understand. That’s how we introduced money.”

Peckham stated that by age 4 his son understood how money worked. But he had more trouble getting his daughter to understand. She did, eventually.

Instill a Habit of Saving

Kids’ early interactions with money will probably begin with spending. They see you using it to buy things, including things intended for them. It’s important to teach them early, that money isn’t just meant for spending – they should be saving money, too.

Saving money isn’t just an essential money habit. It teaches larger life lessons about discipline, delayed gratification, goal setting and planning. Saving builds independence and security, and stresses being prepared.

To help your kids get in the habit of saving, give them a savings jar or piggy bank where they can deposit coins or cash. Then use short, simple statements to encourage them, such as:

  • I love to save!
  • Saving is a great habit!
  • I feel good when I save my money!

You’ll likely have more success teaching young kids to save for short-term goals, such as a toy they really want, rather than saving for something in the future. Helping kids set short-term goals when they are small teaches the value of delayed gratification they can manage. As they get older, they will be better able to save for longer-term goals.

Parents can also encourage their kids to save more by agreeing to match the amount they save dollar for dollar or by a certain percentage. If your children are old enough to advance to a real bank, there are services such as Greenlight or FamZoo, prepaid debit cards and apps that allow parents to transfer money to their kids and pay interest (at a rate of the parent’s choosing) on any of the money kids put into savings.

Future Fortunes Academy provides a great learning tool with their Financial Literacy Flash Cards for kids. They feature 52 important financial terms with kid-friendly illustrations and definitions.

As children begin to understand the saving process, parents may introduce them to the principles of growing their money and the importance of building and maintaining good credit.

Create Opportunities to Earn Money

Most people value money they earn differently from money they receive. Having money of their own, kids learn to make decisions about using it. An allowance can accomplish that. Consider requiring your kids to do certain chores to earn their allowance.

However, there are some chores kids should do without pay because they’re expected to help as part of the family. But if they want to get paid, they can be given opportunities to complete certain tasks. You can structure it as a weekly allowance initially and graduate to a “salary” that is deposited into their bank accounts monthly. Your kids can even negotiate raises by taking on additional jobs around the house.

Help Kids Learn to Make Smart Spending Decisions

In addition to teaching kids about earning money, show them the importance of managing their money. Children will recklessly spend our cash, and any money given to them, but will hold on longer to funds they’ve earned. When our kids understand that the money they’ve earned is all they’ll receive until the next pay period, they will learn how to budget. This will help them tremendously when they enter the real world. Kids will even begin to track how much they have coming in and going out, and how much they’re saving, when using the financial apps available.

Our children should also learn that spending isn’t always about buying things you want, but also things you need, and as they become adults, spending will include paying other people for services. We want to teach our children that personal finance is about decisions – and for every choice they make, there will be a consequence.

Show Kids the Value of Giving

An important reason to teach your kids financial lessons is to share your own money values through those lessons. If giving to others is one of your values, you can instill that value in your children by helping make it a habit for them from an early age.

One idea is to create spending, saving and giving jars. When kids are older, the Greenlight and FamZoo apps allow kids to create their own giving accounts. Or you can help your children set up a special savings account for giving. Then discuss what groups or causes your children want to support. You can visit CharityNavigator.org together to find highly rated organizations.

Model Good Financial Behavior

I am a strong proponent of modeling behaviors we want our children to emulate. They are watching our every move. It is vitally important to make sure the financial instructions we give our children are consistent with the ways we discuss and handle money when they’re in our presence. For example, if you complain about having to spend too much on certain things and then take your kids on a shopping spree, you’re sending mixed messages.

So, model the behaviors and attitudes around money that you want your children to adopt. My parents modeled a strong work ethic for my sister and me. We knew that earning money – and, eventually for me, saving it – was extremely important for our financial security and independence. It is a lesson I passed down to my three children. They have had their own bank accounts since they were teens in high school. Today, they are launched, employed, managing their finances and credit – and have developed problem-solving skills that come in handy when there is a bit of savings in the bank! Our parental instruction around money wasn’t perfect when the kids were growing up. But I have no doubt, with the tools available to parents today, they will teach their children practical financial/life skills, adding to what they’ve learned based on their own experiences and attitudes about money.

It’s beneficial for children to also learn that it’s not how much you make, but what you do with what you make – that makes the difference. Our children need to see us making smart spending and saving choices. In other words, practice what you preach. And indeed, be consistent. Educating children about personal finance is a process that will take time. When we put in the effort, continuously communicating clear messages about money, we will instill good, healthy attitudes and habits that will serve our children well.

This article appears in the January 2023 issue of Washington Parent magazine.

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