Financial literacy focuses on the knowledge and skills you need to make informed money management decisions. The path to financial literacy starts with something as simple as putting a few coins in a piggy bank and evolves over time to encompass more advanced subjects, such as risk and asset allocation.
While literacy – the ability to read and write – is a core part of the education system in the U.S., financial literacy is largely ignored: Only 17 states require high school students to take a course in personal finance. Studies show the result of this education gap is that most kids don’t know enough about money and money management to grow up to be financially responsible adults. (For more, see: 3 Ways to Improve Financial Literacy.)
The President’s Advisory Council on Financial Capability for Young Americans stressed the importance of preparing young people for the future in its 2015 report to the President (the most recent report available): “Given the challenges that young people face, it is clear that financial capability holds great value to individuals, communities and the nation as a whole. Building financial capability for youth better positions them for the critical crossroads that they will face – whether deciding how much to spend or making an informed decision about post-secondary education – and enables them to improve their financial well-being.” (See also: Why Financial Literacy is So Important.)
Still, because most schools don’t require– or even offer – money management courses for kids of any age, the job of financial educator falls primarily on parents and guardians. As an adult, you have experience and perspective on your side, and even if you lack confidence in your own money management skills, you can teach your kids valuable lessons. Financial coaching can occur anytime and anyplace, and repetition is valuable. For example, to teach your child about credit cards (and other payment options, like PayPal and Apple Pay), you can:
- Explain how the payment works and encourage your child to ask questions (if you don’t pay with cash, where does the money come from?).
- Take advantage of a teachable moment when you take out your credit card (or iPhone) to pay for a purchase.
- Show your child the section of your credit card statement that indicates how long it will take you to pay off your balance – and how much you’ll pay in interest – if you make only the minimum payment each month.
- Discuss the credit card offers you receive in the mail and explain why the companies want your business (because they make a percentage of every dollar you spend on your card, plus interest).
Kids are ready to start learning about money at a very young age. By age three, most kids understand that they can exchange money for something they want, and most four-year-olds associate collecting coins in a piggy bank with the concept of saving. Like adults, children have unique learning styles, so it’s important to be mindful of each child’s needs when teaching financial concepts. For example, one of your kids may immediately understand and be ready to build on an idea, while another may need more time and examples before moving onto the next building block. (See also: How Much You Should Pay Your Kids for Allowance.)
It’s helpful to think of financial literacy as a lifelong learning process, rather than approaching it simply as a checklist. Keep in mind, the information you impart is important regardless of your family’s past, current or future financial situation. The need for good money management skills applies to everyone – the wealthy, those in low-income brackets and everyone in between. (For more, see: 7 Financial Lessons to Master by the Time You’re 30.)
In Teaching Financial Literacy to Kids, we introduce topics that are appropriate for the youngest learners – such as what money is and the difference between needs and wants. We cover topics for teens – including budgeting, saving for college and investing – in Teaching Financial Literacy to Teens. Here, we focus on financial topics for tweens – kids who are between the ages of eight and 12 – including income and expenses, what to do with your money, saving for long-term goals, entrepreneurship, saving for a rainy day and an introduction to the stock market.