The Sum Up: Giving kids an early financial education pays off in the future

Does teaching kids and teens about money management and finances pay off later in life? The answer is yes – and we’re not the only ones who think so.

A recent story on CNBC took an in-depth look at this issue by reviewing scientific studies and talking to people who learned about finances at an early age to see how it has impacted their lives. Here are the highlights.

Financial Education and College Grants / Loans

If you’re a parent with young children, you have probably spent a lot of time thinking about how you’ll pay for your child’s college education. With annual tuition at state colleges and private universities on the rise, finding financial aid is a must.

According to a study for the National Endowment for Financial Education, kids who receive financial education when they’re young are more likely to be proactive in financing their education than kids who received no financial instruction. They:

• Seek out lower-cost loans and grants
• Are less likely to settle for high-interest loans
• Are less likely to use a credit card to pay for their education

Considering that the average college graduate in the United States has $37,500 of student loan debt as of 2020, it makes sense to empower teenagers to seek out whatever assistance is available. Nobody wants to start their adult life saddled with tens of thousands of dollars in debt if it’s avoidable.

On a related note, research has shown that students who are aware of the financial resources available to them are more likely to attend college than those who aren’t. With that in mind, eight states – including Florida – are considering legislation to make completing the Free Application for Federal Student Aid (FAFSA) mandatory for all high school seniors.

Financial Education, Credit Cards and Debt

Another area where mandatory financial education can make a difference is in credit card use and debt. The average American household carries $8,425 of credit card debt as of 2022. When you consider the high interest rates of many credit cards, they may pay far more than the balance to get out of debt.

The CNBC story also cites a study from the Financial Industry Regulatory Authority’s Investor Education Foundation, which promotes mandatory financial education in American school systems. It found that students who learned financial basics as part of their regular education had better average credit scores and lower rates of delinquency that students who didn’t receive that instruction.

It may be helpful to look at some examples from the study, which looked at students in Georgia, Idaho and Texas. The study participants experienced increases in their credit scores of 1.8%, 2.6% and 5.2% respectively.

Financial Education and Net Worth

CNBC told the story of a young man named Preenon Huq. Now 24 years old, he first learned about compound interest in a high school finance class. He began saving for his first car and then opened a Roth IRA at age 19. Now employed as an accountant, he already has $100,000 saved for his retirement.

A study from the Brookings Institute concluded that there is a direct correlation between financial literacy and net worth by the age of 25. They believe that every school district should incorporate financial literacy into curricula to give students the information and tools they need to be financially savvy adults.

How Many Schools Teach Financial Literacy?

There’s good news and bad news when it comes to the prioritization of financial literacy in schools. The good news is that all 50 states and the District of Columbia include economics in their K-12 curriculum and 45 states include personal finance in their K-12 standards. The exceptions are Alaska, California, Montana, New Mexico, Wyoming and the District of Columbia.

The not-so-great news is that only 17 states require personal finance to be taught and only 16 incorporate standardized testing of basic economic concepts. There are movements in every state to make financial literacy a priority, but we have a long way to go.

There are good reasons to incorporate personal finance concepts into education. Across the board, students in states that mandate financial education have higher credit scores and lower amounts of debt than those in states where the classes are optional.

What Can You Do to Teach Your Child Financial Literacy?

Let’s look at some ways that you can help your child to be more financially literate even if their school doesn’t teach personal finance basics.

1. Give your child an allowance and use an allowance app to track their money and encourage them to save, invest and donate money.
2. Speak openly to your kids about issues related to money. For example, you can make sure they understand that credit cards are not the same as cash and that they shouldn’t buy anything on credit that they can’t afford.
3. Get them involved in budgeting by giving them a family meal or event to plan. Hands-on experience is often far more powerful than theoretical lessons. A trip to the grocery store with a list and budget can teach them more about comparison shopping than an entire textbook.
4. As they get older, open a Youth Account for them and let them have the experience of using a debit card.
5. Teach them about the basics of investing using an app such as FamZoo or Acorns. Starting your child off with a small portfolio of 5-10 stocks can help them learn how the stock market works, how to balance risk and reward, how compound interest works and other key concepts.
6. Open a college savings account for your child and let them see how the money accumulates over time.

While it would be ideal if economics, personal finance and other related topics were competently taught in every school, don’t let their absence from the curriculum discourage you. Working with your child to help them understand the best way to manage and accumulate money will set them up for lifelong success as an adult.

Addition Financial offers Youth accounts to help young people manage their money. Click here to learn more.