Teaching Financial Literacy To Kids – As parents or caregivers, one of the concepts we must teach our children is the responsibility of managing money. This will be a valuable tool for them to use as they grow and develop into adults. One of the hardest skills for a child to learn is how to spend wisely and delay gratification. They will develop patience and planning skills in other aspects of their lives. Talking to your kids about money at an early age can help them understand the value of the dollar, how to save for long-term goals, and how to spend responsibly. Teaching children about finances can build financial literacy and give them a stronger ability to manage their finances later in life.
“Sometimes parents wait until their kids are in their teens to start talking about money management — when they could start when their kids are in kindergarten.” Important advice from Warren Buffett
Teaching Financial Literacy To Kids
It is a medium of exchange for most goods and services. Children need the ability to recognize the names and values of the different coins and notes used in exchange for goods and services as this will help them understand the concept of purchasing power.
Teaching Kids About Money: Building Financial Literacy From A Young Age
Give your child activities and ideas to earn money. This helps children reach their financial goals and teaches them that spending money is a reward for working. By earning a small amount of money for certain tasks, children realize that work and money are connected.
Introduce children to the concept of dividing money into categories, such as saving, spending and giving. Help children understand that money is limited in amount and must be shared for different purposes.
Successful money management includes having the skills to know how much money is available, how much has been spent, and how much needs to be saved for future needs. Teach children to be responsible with their money by keeping records.
The savings value increases differently depending on how the money is managed. It is important that as children become young adults, they understand how to get the best growth for their money by saving and investing wisely.
Financial Literacy For Kids
Practice comparing purchases and choose the best solution in front of your children. Show them the difference between needs and wants and how to make cost-effective purchasing decisions. Most of us deal with money on a daily basis, so it’s important to understand the basics of financial literacy. Financial Literacy Month is the perfect time to start teaching your kids about money. We’ve identified five financial basics you can start teaching your kids this month. Help prepare your child’s future now.
Financial Literacy Month was started in 2004 by a non-profit organization called Jump$tart. Their main goal is to promote financial literacy throughout the United States, especially in schools for children and teenagers. Early education allows people to develop a healthy relationship with money. Children will then have the knowledge to make smart decisions about how they will pay for college, a car, or even a mortgage as they get older.
Financial literacy empowers people. It is important because it is how people learn to save, earn, borrow, invest and protect their money wisely. According to a FINRA survey, two-thirds of Americans are financially illiterate. Poor financial understanding can lead to poor decision making. This can limit an individual’s and/or household’s ability to meet their financial goals.
The perfect time to teach your kids about money is earlier than you might think. A study by David Whitebread and Sue Bingham from the University of Cambridge found that children often develop their financial behavior from the age of 7. By educating your children early, you can set them up for a better financial future.
How Kids Should Spend Their Money (infographic)
Having a budget means you know how much money is going in and out each month. This is an important financial concept for children to learn. You can help your children create a budget by creating a spreadsheet and letting them enter their allowances and any expenses. Explain that they cannot spend more than their allowance.
When budgeting, it is important to have a discussion between wants and needs. This is a good place to start because even children as young as 3 can understand the concept of wants vs. need. Making good financial decisions starts with being able to distinguish between what is necessary and what is nice to have.
It is important to teach your children to save up for something instead of getting what they want right away. Sit down with your children and create a savings goal. You can give your child an incentive to save, e.g. to match a percentage of what they deposit into their piggy bank or bank account. This also teaches them delayed gratification. For example, if they want to buy the latest video game, they may have to do a lot of work before they can afford it.
You can take them to a bank and have them open a savings account. Depending on their age, you can have them fill out the deposit form and give it to the cashier. When the money is in the bank, you can sit down and review the monthly statements with them. Show them how to read a monthly statement and check for accuracy. This will help children understand how their choices affect the outcome.
Foundational Ways To Boost Your Child’s Financial Literacy
This is the idea that money can make you money or cost you money. Teach your children that when you take out a loan, you yourself are responsible for repaying the principal and the interest you accrue on the loan. The faster you repay the loan, the less interest you pay.
When you have a savings account that earns interest, the interest is added to your principal. Interest is then earned on the new, larger principal. This is known as compound interest. This is an important concept for children to understand. If they start saving early in life, it will make a big difference in their overall wealth later in life.
Inflation is defined as the decline in your purchasing power over time. This means your dollar can buy less today than it would have a year ago. Inflation has risen at rates not seen in the last 40 years. I’m sure you will have many personal stories about inflation that you can use to explain the concept to your children.
Understanding inflation is important for children to understand that the price of things does not always stay the same. This means that if something goes up in price, they have to go home and reassess their budget or savings goals. For example, you can buy a candy bar for $2 today. A year from now, the same candy may be $2.50. You would still only have $2, but the price of the candy bar has gone up. The low price was “inflated”. This also teaches your children the importance of putting their money in some sort of interest-earning account to try to keep up with inflation.
Six Ways To Teach Your Kids About Saving Money
5. The importance of establishing a credit history and keeping your credit card balance below 30% of your credit limit.
This financial fundamental is especially for teenagers. Before your teen goes off to college, help them get a credit card. Co-signed parent accounts have low credit limits. This will help your teen learn how to manage credit safely and start building a credit history.
Teach them about credit scores. Your credit score is a 3-digit number that represents your financial record. It ranges between 300 and 850. It allows financial institutions to determine the risk they are taking on by lending you money. If your credit card balance is higher than 30% of your credit limit, it can cause your credit score to drop.
This basically means, try not to spend more than you earn. Try to keep your debt in check. Don’t take more than you can comfortably handle. Pay your balance each month and keep your revolving credit high. It is important to have a good credit score because it can help you when you need to take out a loan and you can even get financing at a lower interest rate.
Creative Teaching Press
Financial Literacy Month is a great time to have discussions at home about saving, spending, budgeting, gifts, and other financial-related topics. Assess your current financial knowledge and teach your children the basics so they can grow up with a strong financial foundation. Parents who teach their children about financial literacy set them up for a happier and more secure future. If you want help with finances for your family and are interested in having a complete financial plan, feel free to take a discovery call with one of our financial advisors today!
Alvin Carlos, CFP®, CFA is a payment advisor and financial planner in Washington, D.C. who works with clients across the country. He has a Masters in International Relations from SAIS-Johns Hopkins. Alvin is a partner at District Capital, a financial planning firm designed to help professionals