Why Do You Need To Teach Your Kids Financial Literacy?

Over several years I’ve been reacting to articles in the news about increasing debt for young people. And people in general.

Young people who get one, or two, or more credit cards and max them out. They end up with a ton of debt and sometimes with no viable way of repaying.

In August 2017, MarketWatch reported Americans hit a milestone. More credit card debt than ever before. A collective debt of over 1 trillion dollars. How many zeros are in one trillion again… oh yeah, twelve. Twelve zeros.

That’s a lot of debt.

How is this happening? Why do we think it’s a good idea to rack up more and more debt? How can we change this in the future? It boils down to teaching our youngsters financial literacy, that's my take on this.

You want to raise money smart kids, but you don't know what to focus on? In this article I mention 7 things you should think about to make your kids money smart.


What Is Financial Literacy

I’m currently re-reading a personal finance book. In it, one of the first things the authors write is that having an understanding of money is a foundation in any good financial situation for individuals. Let’s relate this to the topic I want to discuss.

Financial literacy.

It’s another fancy concept when it comes to economics and finances. I guess it’s rather easy to get what it means. But I will still give a short explanation.

Much like ordinary literacy is the ability to read and write, financial literacy is the ability to understand finance and money. Because of this understanding, you can make informed decisions about your own finances.

Why Financial Literacy Then?

What we as parents do can rub off on our children. I know this isn’t always true. But if you can’t read yourself, can you expect to teach your children to read? No. The same is true with finances.

To be able to make a basic budget and balance your money is a fundamental part of financial literacy. Understanding why you should have a financial goal and how you set one is also part of this knowledge.

Very important is also the ability to understand debt and how it occurs. Or, more importantly, how to avoid it.

If we don’t have a basic financial literacy, we’re at the mercy of financial institutions to help us invest and govern our money.

I’m a bit cynical about certain things in this world. Financial institutions are one of the things I’m cynical about.

We have an increasing number of ways to invest our money. The financial world is good at inventing new ones and they get harder and harder to understand.

I don’t think the optimal situation is to rely on financial institutions to make our investment decisions for us.

The Problem With Money You Can’t See

I want to discuss something I mentioned in a previous article about what money is. The fact that you don’t see physical money as much nowadays.

A few days ago I withdrew money from an ATM for the first time in months. I’ve not handled physical money in that long, yet I do something involving money almost every day.

What does this mean to our children? If they never actually handle money in a real way, can we expect them to understand the value of it?

I’m going to sound old for a little bit. When I was growing up, we used to shop with physical money all the time. We went to the store and brought the cash. It was easy to see how much money you had and what you could buy.

There are two things that have changed a lot since then, and I’m talking like only 20 years ago. We hardly ever bring cash, as I mentioned before, and we go less and less to stores.

Sure, you probably buy groceries at the store sometimes. But even that is decreasing with the ability to get stuff delivered to your door.

So, we shop online with money we don’t really see, often with credit cards.

Do you think it’s easier for us to end up with credit card debt nowadays? If we have a higher level of financial literacy it will be easier for us to avoid this. To understand the risks of using, or rather overspending, with our credit cards.

Can You Teach Financial Literacy To Younger Kids?

I’ve been thinking about this a lot since our daughter was born about two and a half years ago. How do you actually teach young children financial literacy?

It’s not an easy question to answer. Partly because children, as adults, are individuals. They might think this is the most boring thing in the world. And partly because of the complexity of the subject in itself. Because finances are complex, right?

Does it have to be? Nah!

Before I continue here I want to mention limiting beliefs. It’s argued that one of the reasons we lack financial literacy today has something to do with limiting beliefs about money. We have the idea that money and finances are more complex and complicated than they are.

A cynical thought. Could it be what parts of society wants us to think because they make money off it?

Yes I know I said earlier that certain things we can invest in are complex. But the basics of money and finances doesn’t have to be.

The First Step To Financial Literacy For Kids

I say that the first step to making your child develop a financial literacy is to understand the concept of money. Where it comes from and why we use money.

It sounds basic I know. But I’ll use a literacy analogy again. If you don’t understand the alphabet, can you understand how to spell words?

You can teach children about money at a rather young age. You can start to have the conversations about this when they start showing interest in money.

I’ve started talking to our daughter about money now at age two and a half. She shows interest sometimes.

Even if your kid doesn’t show interest, try to make it fun and get a small foundation. Play store and discuss money. Be creative and have fun here and make it fun for your child. Use toy money and show them how they have less money after buying something.

The Second Step To Financial Literacy For Kids

Teach them about saving. Teach your child why it’s a good thing to not spend all the money now and let it grow. Put money in a jar or a piggy bank. Make it visual and use physical money for younger children.

Once your child gets older you can help them set up a savings account and explain that the money actually grows here too because of interest. You could visualize this with real money. Even for younger children. You could, if you want, give them interest on their savings.

This is a little tougher as a lesson and requires that the child has some understanding of maths. You can start this once the school, or you, start teaching them about maths too.

The Third Step To Financial Literacy For Kids

Allowance. When your child is old enough to understand maths, she or he is old enough to get an allowance of some sort. Most likely anyway.

There are many different systems and suggestions on how to handle allowance and I could write an entire post about that alone. I will mention that a common way to give allowance is $1 for each year of the child’s age, per week. So a 5-year-old gets $5 per week.

I put no value in that way of treating allowance. I only wanted to mention it.

In relation to financial literacy, it’s important that that’s all the money your child gets. If your kids go on a crazy candy shopping spree and spend all the allowance the first day of the week, tough. Don’t give her or him more money.

Make your kid understand that money is a resource you have to handle with care. When it’s gone, it’s gone.

Also, don’t encourage loans. I have a strong belief that it will only hurt your kid in the long run. Think credit card debt.

Loans, in my opinion, foster a mentality that it’s ok to borrow money without thinking about the consequences.

The Fourth Step To Financial Literacy For Kids

Remember that I said that budgeting is a foundation in financial literacy? You should start early with budgeting too. No, it doesn’t have to be an advanced spreadsheet kind of budget.

I’ve previously written about different kinds of budgets and in that post, I mention the envelope budget. Use a variation of the envelope budget for children.

The jar budget.

I didn’t invent this system and I’m not trying to take any credit for it. I’m only here to pass along the information.

Get some nice jars. People usually recommend three to start with. Lable them. The most common way to set this up is with one jar for Savings, one for Spending, and one for Sharing. It doesn’t have to be three jars. It can be five if you want. You could subdivide spendings into for instance Hobby and Sports. Or something too.

You know best what might work for your child.

The next step is to divide the child’s income into the budget categories. You know all about this now since you’ve read my in-depth posts on budgeting, right? Set a percentage of what should go into each of the jars.

I always say it’s best to save more than you want to and suggest a split of Spending - 50%, Savings - 40%, and Sharing 10%. This is of course up to you and your child to agree on depending on your lifestyle and values in life.

The Fifth Step To Financial Literacy For Kids

Now that your child has come so far as to learn how to budget it’s time for the next step. This is something we all have to practice all the time, everyone of us.

We live in a society where we’re exposed to advertising designed to make us want stuff we don’t need.

Yep, those are the key concepts in this step. Need versus want. Our children must understand what is a need and what is a want.

Need relates to things we actually need to survive and handle our day to day life. It’s things like food, shelter, clothes, medicines and other medical care, water, heat and other things that can relate to shelter. Well, you get it. Things we need.

Want is stuff we can survive without. Luxuries if you will. Things like smartphones and other electronics, candy and other unnecessary things we eat or drink, television, streaming services, video games and consoles, the latest cool watch from some designer company, and so on. Things we don’t need to survive.

If you teach your children to distinguish between need and want they can potentially save a lot of money, not buying things they don’t need. Yes, it’s ok to buy something you want every now and then, but budget for it then.

The Sixth Step To Financial Literacy For Kids

Goals. I’m referring to savings goals, both short-term, and long-term.

Short-term can be to go to that music concert this summer. Long-term goals can be things like saving for the first apartment or the first car.

Teaching the power of goal setting can help your kids stick to their budget, even when they don’t want to. Our goals are the maps of where we want to go with our financial life.

The Seventh Step To Financial Literacy For Kids

This is not a step as such, but never stop talking about money and discussing it. If you’re interested in budgeting and saving money then discuss this in your family. Include your children early on.

If you’re getting a new car, or boat, or a bunch of bunnies for a bunny farm, talk about the investment and the best way to go about the deal.

Before We Wrap This Up

As I’ve mentioned a few times in this post, we have to know what we teach. Our children look to us as parents to learn about life.

If we have bad or weird opinions and values about money and our finances, there’s a good chance our children will have that too.

I feel that it’s important to learn about finances from an early age to have a better chance of avoiding financial hardships later in life. Help your children build a good foundation by having a good knowledge about money. This might help break this cycle of debt so many people find themselves in.

I want to say that the ideas here are things I’ve considered when it comes to teaching our daughter financial literacy and things I’ve read about the topic. It’s based on my feeling of what is logical and could work.

As always when it comes to money and understanding money, I want to stress that it’s best to consult a professional financial advisor. You can learn a lot by reading and doing, but if you need extra help hire a professional.

What About You And Your Family?

Have you and your family thought about financial literacy for your kids? How are you handling it?

Financial literacy is as important as ordinary literacy and is something you should teach your kids sooner rather than later. Teach them basics about financial things like money, budgeting, debt, and how it all connects. If you teach your kids financial literacy you give them a better chance in their finacial life later.

About the Author

I've always had an interest in personal finances and money. Since money is so closely connected to our happiness I want to share what I've learned during the years. My mission is to make things a bit better in the financial area for people who read my post.

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