Learning about money is the foundation of financial literacy and is key to achieving financial security. What can parents do to help with the financial education of their children? Even though parents often have a treasure trove of financial wisdom to offer their children, many children aren’t learning personal finance from their parents, according to a survey by CNBC.1 Parental lessons can go far beyond dollars and cents – they can instill crucial values and habits that can shape a lifetime of financial well-being.
Talk About Money as a Family
Money can feel like a taboo topic, but families can overcome the awkwardness by having regular discussions about money in which everyone in the household is included. Family discussions about money, in which everyone gets a say and can contribute to the family’s financial goals, are a great way to keep the whole family engaged. Creating give-save-spend banks is a fun family activity that even the youngest little ones can participate in to start thinking about goal-setting and helping others.2
Learning how to handle money is a lifelong process. However, the earlier children embrace good financial habits, the more likely they are to find financial success. The Consumer Financial Protection Bureau is a resource for tools and resources to help parents talk to their children as they grow.3 Below are some tips for teaching children by age group.
Financial Lessons for Preschoolers
Very young children won’t understand the value of money. Still, they can be introduced to money through fun activities such as learning the names of coins and playing store to exercise their imagination by exchanging play money for goods. Asking children what they need and what they want can help them learn valuable lessons. For example, include preschoolers on a trip to the grocery store and put eggs, milk, and bread into the cart before picking up candy, a toy, or stickers to help them understand this process.
Financial Lessons for Elementary School Children
Children in elementary school start to understand how money works. By seven years old, children develop basic financial behaviors, including counting and exchange, according to a University of Cambridge report.4 They can recognize different kinds of coins and bills, group them, and then count that specific set. While exchange is a more difficult lesson, children should be taught that money must be given to make a purchase and can only be spent once.
With a basic understanding of the purchasing power of money, elementary school children will probably want more. This is the time to explain how to earn money and save it. The Federal Deposit Insurance Corporation (FDIC) has suggestions to help teach these principles at school or home.5 Providing children with a regular allowance gives parents the opportunity to discuss the basics of saving, spending, and budgeting. According to Gregory Anton, CPA, CGMA, chair of the AICPA’s National CPA Financial Literacy Commission, “Instilling basic financial literacy in children when they are young will better prepare them for the financial decisions they make as young adults and serve them throughout their lives.”6 According to a recent survey by AICPA, over nine in ten Americans (92%) agree that allowance serves a purpose, with 81% saying that it teaches children the value of money and financial responsibility. However, the onus is on parents to make sure that the lessons are sinking in. One of the ways that parents can use allowance as a teaching tool is to encourage their children to save ten percent on a weekly basis and match the savings if they do.
Financial Lessons for Middle Schoolers
At this stage, parents can expand on the concepts of income and budgeting and reinforce the idea of saving vs. spending. Explaining short-term needs and long-term goals and establishing an emergency fund can include discussing the benefits of saving money at a bank versus at home. As the balance grows, parents can discuss the concept of interest and how the bank pays people back for saving their money. Parents can also instill the value of learning to appreciate what they have and understand the benefits of giving back and donating to charity.
Middle school is a good time for parents to check their child’s financial literacy progress. Jump$tart Coalition has national standards for educators to set financial literacy goals.7 The benchmarks by eighth grade include:
- Set spending priorities to reflect goals and values
- Discuss the components of a personal spending plan, including income, planned savings, and expenses
- Compare saving strategies, including “Pay Yourself First” and comparison shopping
- Illustrate how inflation and interest can affect spending power over time
- Justify the value of an emergency fund
Financial Lessons for High Schoolers
High schoolers are looking for and need new levels of independence. Many of the lessons at this stage are gained through firsthand experiences with maintaining a checking account and budgeting for college or living independently. One of the most important financial lessons that parents can share at this stage is helping their children understand credit cards. Giving teens an understanding of the potential risks and rewards of using credit cards, and how they differ from debit cards, can help them avoid costly mistakes in the future.
Parents can help prepare their children for the future by explaining that credit cards aren’t free money; every time they use a credit card, they’re using someone else’s money. The cost of borrowing that money is paying interest. They can explain that the best way to use credit cards is to make a few small purchases and pay the balance in full, on time, every month. This strategy helps build a good credit score. Talking about the responsible use of credit cards can lead to a discussion about the importance of building good credit and the impact it has on future financial goals. Parents should also address how a low score can make it difficult or impossible to obtain manageable rates on credit cards and loans.8
During high school, parents can encourage their teenagers to begin saving by working a summer job and setting up a savings account. This is also an opportunity to introduce the concept of long-term saving. Parents can use a savings account to introduce the concept of owning assets. This can lead to a larger discussion of saving and investing to build assets for long-term goals. Purchasing a car, which is high on most high schoolers wish-list, can be a great example for parents to explain ongoing costs associated with having a car and introduce the concept of a depreciating asset that loses its value over time.
Opening a Roth individual retirement account can help put a child’s earnings to work for the long-term. Many people don’t realize that there is no minimum age to open a Roth individual retirement account. A child must have earned income to qualify but convincing a child to hand over their earnings for retirement can be difficult. However, parents or grandparents can contribute to the child’s Roth account (up to the entire amount the child earned during the year with a cap of $6,000). They can offer to match a child’s contribution to help teach them the importance of long-term saving and set the stage for contributing to a 401(k) later in life.9
High school is also a great time to start honest conversations about finding a career that will support the child for a lifetime. Parents can help their children explore job options and discuss responsibilities and paychecks. This is also an excellent opportunity to explain why a salary differs from how much you take home due to taxes, Social Security, insurance premiums, and other deductions made from a paycheck. If a teenager is headed for college, now is the time to begin discussions to set them up for success.
Food For Thought – The Increasing Popularity of Digital Wallets
The world we live in is rapidly going cashless. Alarmingly, 37% of parents and 78% of teachers feel that digital transactions damage children’s understanding of money. But the reality is that children are growing up in a world with an increasing preference for cashless payments. Parents need to teach their children about the concept of digital money and how to handle it. One of the most important lessons to teach children is that digital money, through stored-value items on smartphones, it still money. Digital wallets are just like their physical wallets — they contain money that can be used, just in a different form. Children also need to be reminded that digital money is not an infinite supply, and it can run out if they overspend.
There are e-wallet apps and services that are designed to start a child’s digital money journey. These apps often allow parents to monitor their children’s spending habits. Children may buy products online without realizing that they’re spending actual money. To help a child understand that these purchases cost physical money, parents can consider taking out a sum of the child’s physical savings to make digital purchases or introduce a digital allowance on the app. This can help children realize that there is a trade-off, and that these items cost them money in the real world. Parents should consider holding weekly reviews of their child’s spending, and take the opportunity to discuss budgeting, money management and saving.
Remember, it’s never too early or too late to build a solid foundation for your child’s future.
Contact the Treehouse Wealth Advisors team for more information on how we work with families to create an overall financial plan.
Sources:
1 https://www.cnbc.com/2023/04/24/10-smart-ways-to-teach-kids-about-money-through-the-years.html
2 https://www.usmint.gov/learn/kids/resources/coin-activities/spend-save-share
3 https://www.consumerfinance.gov/consumer-tools/money-as-you-grow/
4
6 https://us.aicpa.org/press/pressreleases/2016/four-in-five-americans-say-allowance-teachesfinancial-responsibilty
7 https://natljumpstart.wpenginepowered.com/wp-content/uploads/2021/10/2021_Natl_Standards_Downloadable_final.pdf
8 https://www.takechargeamerica.org/teach-your-teens-these-credit-card-lessons/
9 https://www.nytimes.com/2022/06/10/business/kids-roth-ira-retirement.html
