What does your child know about money? They may learn how many pennies are in a dollar and other basics in elementary school, but most financial literacy for teens and kids is learned at home.
There are lots of important money lessons for kids that you can impart as a parent – but where should you start? We believe that the best education starts with creating a base of knowledge and building on it.
With that in mind, we’ve compiled some of our best financial education for kids with money management advice from some of our favorite experts. Here’s what you need to know to help build financial independence in your children.
The Four Ways to Use Money
Without guidance, young children and even teens may see money only as something to be spent. From an early age, they see the exchange of money for everything from food to toys. You can expand their horizons by teaching them that there are other options available.
Christopher Liew, CFA, is the Creator of Wealth Awesome. He told us that parents should teach their kids:
“The different options that [they] have with money. [They] can spend it, save it, borrow it, or invest it. Explain to them the benefits and downsides of each option. Learn about the time value of money, and how a dollar saved today, if invested wisely, could be worth a lot more in the future.”
Here, we’re not talking about digging deep into the finer points of investment strategy. Instead, the first step is to give your children an overview of the various ways they can use their money and the differences between them. That way, they’ll learn that spent money is gone, saved money can be used later and invested money can grow and provide them with financial security in the future.
How to Spend Responsibly
Spending money is part of life and kids need to be shown how to spend responsibly. One of the best ways to demonstrate is by example. Karen Condor is a Personal Finance Expert at USInsuranceAgents.com. She offered these words of advice:
“Parents can teach money lessons by example, displaying financial self-control in being mindful about what they buy, how often they spend, and using credit responsibly, as well as committing to saving and investing.”
A good way to start is to take your children shopping with you or get them involved in online shopping. Even something as simple as sorting prices from highest to lowest, or vice versa, can help them to understand that paying top dollar isn’t always necessary.
A related tip came from Krista Fancher, the Associate Director of Innovation Diploma at The Mount Vernon School. In her program, she puts children into real-world situations to give them hands-on experience. She shared a spending lesson from her school:
“Last year 9th-grade students designed a dinner to bring community leaders together. They planned the budget, which required them to compare food prices. Paying for groceries was an eye-opening experience for students who were surprised to learn what food costs. They had to balance the desire to provide a high-quality menu to stay within the budget.”
You can bring this lesson home by putting your child in charge of planning a meal or a family outing and giving them a budget. When kids get a chance to see how money works, and how overspending in one area can leave them short in another, they learn very quickly that responsible spending can have a big impact on their lives.
How Debt Works
If you’re like most parents, then you’ve pulled a credit card out and used it to buy everything from groceries to airline tickets as your kids watched. They know that credit is part of life but they may not understand the flipside of credit: debt.
We received multiple suggestions about the importance of debt education in financial literacy for kids. Bryce Welker, CPA, is the CEO of CPA Exam Guy. He told us:
“The two fundamental money lessons children need to be taught, and they lie at the heart of overall financial literacy, are that money is something to save and taking on debt is to be treated with the utmost caution.”
We got similar advice from Mason Miranda, a Credit Industry Specialist with Credit Card Insider. He emphasized the importance of teaching kids that credit cards are not free money and that it’s a mistake to buy things on credit if you don’t have the money in the bank to cover the purchase. He also made three points about how parents can teach kids to avoid debt:
- On-time monthly payments on all debts are key for improving your credit, and setting your financial future up for success.
- It's best to pay as much as you can each month toward your debts, but be sure to make at least the minimum monthly payment.
- By missing debt payments, not only do you risk paying more in fees, but you may also have other consequences such as getting your car or home taken away, a ding to your credit score, or an inability to borrow in the future.
We would also suggest that basic financial literacy for teens should include an explanation of how the credit scale works and how to evaluate credit card offers.
The Basics of Investing
Investment basics are a vital part of financial education for kids. When they understand, from an early age, that investing money now will set them up for future financial freedom, they get excited about the prospects and can build a portfolio even before they have a diploma.
Several of our financial experts talked about investment. Max Kimmel is the Owner of One Shot Finance. He told us that he believes kids should learn how compound interest works and how to invest in the stock market.
We agree and we think that with both concepts, practical experience is the preferred option to teach kids. An investment app like Acorns can help kids learn the basics and see their investments in action and learn a lesson in delayed gratification.
Karen Condor gave us some ideas in this area, too:
“Parents can teach kids and teens about investing and stocks by explaining terms and concepts such as return on investment, risk versus reward, how stocks work, and different ways to invest in stocks. [They can also] teach kids and teens about saving before investing, explaining what saving is for and following that up with explaining what investing is for. Then show examples of the benefits of investing, and start off their investing with conservative products, such as a certificate of deposit (CD), so they can witness how investing concepts are applied.”
We really like the idea of starting with conservative products to teach kids about risk. A big part of any successful investment strategy is understanding your personal risk tolerance and how it should impact your overall savings and retirement goals.
How to Protect Their Money
One topic that our experts didn’t mention is something that we talk to members about all the time: online security. We believe that parents should teach their kids how to protect themselves and their money by giving them the tools they need to be financially savvy now and as adults.
A good place to start is by explaining to kids that while most people are good and want to do the right thing, some people will try to steal from others. You don’t want to scare them, but they should be aware that scammers exist. At the same time, you should tell them that they are empowered to protect themselves.
From there, it makes sense to have a conversation about password safety and to explain the basics of two-factor authentication. Your child or teen may be tempted to reuse passwords and unless you explain to them why that’s dangerous, they’ll probably do it.
If your child has a debit card or credit card, then talk to them about why it’s important not to share their card number or PIN. If they have a smartphone, you may want to help them create a mobile wallet and explain the benefits of using one.
Finally, we suggest talking to them about some of the most common online scams and how to avoid them. If your child has a bank account or credit card, they may get phishing emails. They should understand what to do when they get an email that requests financial information. By walking them through how to verify an email’s authenticity, you can help them be safe online and turn into savvy adult consumers.
Financial literacy for kids and teens is just as important as anything that your kids might learn in school. Teaching them about the basics of spending, saving, investing, debt and security can help them avoid some of the most common financial problems that we face as adults.
At Addition Financial, we’re big believers in financial education for kids. That’s why we offer a youth savings and checking account to help teach kids critical money skills. Click here to open an account now.
Posted on May 5, 2021
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