The majority of kids in the United States today spend 12 years in elementary, middle and high school, and many spend another four or more years in higher education. Unfortunately, most will learn very little, if anything, about personal finance during these years of schooling.
This is ironic because personal finance is important to virtually every American, regardless of which career path they choose. Almost everyone needs to learn the basics of money management, bill paying, saving and investing in order to manage their personal finances responsibly once they become adults.
It’s Your Responsibility
Since most kids aren’t learning financial literacy at school, this usually leaves it up to parents to teach them sound financial management principles at home. So what is the ideal age for teaching kids about money?
Some children as young as 3 or 4 years old can start to grasp the concepts of earning, spending, saving and even investing money. Therefore, you could begin your financial literacy efforts by giving your kids an allowance beginning around this age. How much you give them will depend on things like the child’s age, your family’s income, your cost of living and other similar factors.
It’s often a good idea to tie receiving an allowance directly to doing chores or handling other responsibilities assigned to a child. This helps kids understand the concept of receiving compensation or reward in exchange for performing work. The allowance should be paid to kids consistently, whether on a weekly or monthly basis, just like if the child had a real job. Otherwise, this could send the wrong message to your kids early in their life about work and compensation.
Give Your Kids Spending Autonomy
It can be tempting for parents to tell their children how (and how not) to spend their money. However, it’s usually best to give kids as much flexibility as you can (within reason) with regard to what they do with their earnings. Sure, there’s a chance they might make some foolish spending decisions, but it’s better for them to learn from their financial mistakes now when the consequences are minor than later when they’re much greater.
The one exception here is that you might consider requiring your kids to save and give away a percentage of their allowance — for example, setting aside 10% for saving and 10% for giving. One idea is to label three separate money jars Spend, Save and Give. This will help teach your kids the importance of saving and being generous early in life.
Over time, you can gradually increase your kids’ allowance by giving them a “raise” on their birthday. If they start working part-time jobs as teenagers, you could start lowering their allowance and eventually phase it out completely as they become more financially self-sufficient.
Three More Financial Literacy Lessons
Here are a few more things you can do to help your children learn financial literacy:
1. Teach them the basics of budgeting. This is one of the most important financial skills anyone must learn so it’s smart to expose your kids to budgeting early on. Start with their income and add in their expenses, like entertainment, electronics or their contribution toward their cell phone bill, car payment and car insurance. Then show them how to compare their total income and expenses and make adjustments, if necessary, to ensure that income meets or exceeds expenses.
2. Help them open a bank account. Make an appointment at the bank to sit down with a representative and open a checking or savings account for your child. Along with the representative, explain how the account works and the role of checks and a debit card. Your teen will probably need a bank account when he or she gets a “real” job at a restaurant, store or other retail establishment.
3. Show them how to set financial goals. Having financial goals is just as important for kids as it is for adults. For example, maybe your child wants to save up money to buy a new bicycle or game console. Or maybe your teenager wants to start saving for a car or make contributions to his or her college savings fund. The important thing is to teach your kids that smart financial management requires planning now for future financial wants and needs.
Undoubtedly, there are lots of lessons you want to teach your children before they set out on their own: lessons about responsibility, morality, spirituality, citizenship and more. Teaching them sound money management principles and financial stewardship is also important — so don’t neglect these lessons as well.