Teaching Children Financial Literacy

moneyKids need to learn the value of a hard-earned dollar, but they should also learn how to save, spend wisely, be charitable, pay taxes, invest and eventually become financially stable.  The earlier they start on this path, the better off they will be.  Here are a few recommended money lessons for children as they age.

  • Ages 3-5: Practice Waiting.  The simple lesson of delayed gratification will benefit them for the rest of their lives.  Tell your toddler that you’ll give him a cookie now if he wants it, but you’ll give him two cookies if he waits an extra ten minutes. Lesson learned: Be patient and wait for a bigger payoff, rather than always going for instant gratification. Find three jars and label one for saving, one for spending, and one for sharing.
  • Age 6: Start Giving Allowance.  Elementary school-age kids start to become more interested in money. Many experts advise starting kids with an allowance around age six, which means that if they want something just for fun, it’s up to them to save and figure out how they’ll get it.  You can supplement the basic math skills your child learns in school by having her count out and pay for her own small purchases.
  • Age 9: Open a Savings Account.  At this age, kids are old enough to understand the concept of saving.  Open a custodial savings account. Making their first deposit is an important step in learning how to save, which is an essential skill for a successful financial life. Don’t let him withdraw money at will – if he wants to save up for a big purchase, he should talk to you about it – but tell him you’ll take him to the bank to make deposits whenever he wants.  For every dollar he contributes, consider offering to match it, for example, you put in 25 cents for every dollar he saves.
  • Ages 13-14. Learn about the Stock Market and Investing.  Tell your child, “I invest my money in the stock market to help it grow; in the short-term, there’s the risk of losing money, but over the long-term it’s one of the best ways to make the most of my money.”  Show her a historical graph so she can see that, although the numbers sometimes dip, they tend to rise over time.  Really ambitious teens who want to start investing can even find mutual fund options for young savers.
  • Ages 15-16. First Debit Card and First Job. The debit card will give them easy access to their money.  It’s a good time to talk about the importance of PIN security and how to use an ATM safely.  Encourage them to check their account balance often to monitor their saving and spending more closely.  At this age, teens start going out with their friends and spending money more independently than before. Let your child feel his own power to make money and the freedom that comes from making his own spending decisions. Teach him the concepts of gross pay, take-home pay and paying taxes on his income.  Also, a great place to save and invest is to open a Roth IRA.
  • Age 17. Explain Credit Reports.  Your teen may be getting ready to go to college and she’ll need to understand the ideas behind credit.  Look up her credit report and score with her online (even if she doesn’t have any credit yet, it’s a good exercise to show her the steps involved). Ensure she understands the importance of keeping her credit score high by paying off every bill in full and on time.  She’ll need to develop good credit to eventually get loans for things she wants, like a house or a car, and it takes many years to develop a good track record.
  • Ages 18-21. Decide on Student or
    General Loans.
    Before your teen heads off to college or into the working world, he needs to fully understand how loans work – he’s borrowing money to use now, but he’ll be paying interest on that money even while he pays it back.  Sit down together to go over student loans.  Talk about whether your young adult will be taking on this financial burden, and whether you’ll be helping.  Both of you should understand the terms before signing them.  Together, come up with a solid plan for saving money while in college and repaying those loans afterward. Offer advice about getting the best terms when refinancing student loans.

Plenty of books offer additional advice on raising financially responsible children. Some helpful books include:

Finally, the National Endowment for Financial Education offers an array of terrific teaching resources for parents. And, of course, we’d be happy to discuss your family’s unique situation in greater detail. Please feel free to contact us at any time.

About Barbara Richardson

As Director of Client Services, Barb leads the effort to improve the Independence Advisors client experience, taking advantage of insights from more than 22 years experience in financial services.

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