3 Ages, 3 Money Lessons: A Parent's Guide to Raising Financially Savvy Kids
It's never too late to start helping kids learn about money. Whether you have preschoolers, preteens or teenagers, here are some age-appropriate ways to help them spend, save and borrow wisely.
Financial literacy is the process of developing the appropriate skills to make informed decisions with the financial resources you have available. It is about more than "money management." It is about understanding how money impacts different aspects of your life.
The different components of financial literacy include:
- Understanding your earnings
- How to save and invest
- How to budget and spend
- How to properly borrow funds and take on debt
In addition to knowing how money flows, being financially literate helps build confidence, independence and resilience. When you know you can depend on yourself to make good financial decisions, you are putting yourself in a position to succeed.
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Most people wait too long to learn about money. I was fortunate that my first experiences with financial management came while I was still living at home with my parents. In my junior high home economics class, we learned how to balance a checkbook.
My first experience with earnings and spending came during high school when I got my first job. I learned how to budget my expenses not based on my earnings, but on my take-home pay after taxes.
I also had to account for a monthly loan payment on my car and understand the difference between interest and principal.
Looking back has made me wonder how today's parents can help their own kids begin their own journey towards financial literacy. For many people, resources are scarce. And it may seem there isn't much to do until kids get their first job.
But there are plenty of daily activities that have some relation to financial literacy and can help parents take more ownership of their kids' financial education.
Our firm recently launched a free tool for parents called The Lern-ing Curve. Parents can use it to find age-appropriate lessons and activities that will teach kids how to become financially literate.
Beyond that, though, the real teaching happens in daily life. What that looks like changes a lot as your kids get older.
Start young: Make it a game
A lot of parents think kids need to be older to understand money and finances. While we shouldn't expect a 3-year-old to help with 401(k) allocations, there are plenty of activities parents can do with young kids.
The key is to make it fun. Playing board games with dice can help kids learn their numbers and how they apply to the real world. Sharing with siblings can also be turned into an everyday commerce situation.
Sharing and trading Halloween candy is a perfect example. One small chocolate might not be worth the same as a bag of gummy bears unless one person loves chocolate and the other loves gummy bears. If they like both equally, maybe the small chocolate can be exchanged for half a bag of gummy bears.
These are the exact types of activities that parents are likely already engaging in without even realizing they are helping their kids become more financially literate.
The preteen years: Goals and budgeting
As kids continue to grow and learn new concepts, the same games might not be as useful or engaging. During the preteen years, kids are learning more about themselves and developing their own personalities and mindsets. They are more independent thinkers and can comprehend more sophisticated concepts.
Helping them set achievable goals that are important to them boosts confidence and teaches the value of hard work.
By working on a savings plan for these goals, parents can show their kids how to achieve short-, medium- or long-term wants and needs. From a budgeting perspective, parents can show their kids how they allocate available money.
- Short-term spending can be on everyday items like groceries and gas
- Medium-term savings might be for a family trip or gifts for the holidays
- A long-term goal could be saving and investing for college
With these types of activities, kids can see in the real world how finite resources are used and can start to learn how they would want to allocate their own allowances or resources.
The teenage years: Jobs, taxes and debt
During the teenage years, kids become even more independent. They may start preparing to leave home and find their own path. This is when parents generally start trying to teach their kids about money.
Getting a job outside of school teaches kids that there's more to earning money than just wages or salary amounts. Working with your kids to understand taxes can help them learn to budget and understand their real take-home pay.
With that take-home pay, they can start setting more long-, medium-, and short-term goals.
This is also a time to learn about debt and how to use it. From finding out how credit cards work to learning about car loans, it is important that kids understand the difference between using money and borrowing money to stretch what they already have.
You may already be doing a lot of this with your kids. But by working with your adviser or visiting The Lern-ing Curve, you can take an even more proactive approach to teaching your kids the building blocks of a successful financial future.
The earlier kids start understanding how money works, the more financially literate they will ultimately be.
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