Kids These Days: Why Financial Literacy Should Start Early

Nobody ever said a parent’s job would be easy. Keeping food on the table and a solid roof over everyone’s heads are among duties at the top of the list, of course. On top of that, there’s another critical item: teaching kids about money.

Financial literacy is a critical competency children should learn at an early age to help put them on a path to health and happiness as adults, experts say. Dropping a few coins into a piggy bank every day is good, but there’s much more to it than that.

As adults, we have a number of responsibilities to make sure our kids make informed, thoughtful money-related decisions through every stage of life—and ultimately achieve financial well-being.

Financial literacy or capability is “particularly important for children, because this is a lifelong skill,” says Ted Beck, president and chief executive of the National Endowment for Financial Education.

“We all need to know how to manage our money,” Beck says. “The fortunate few are learning in schools. But we need to step up our game and make sure all kids are prepared to effectively handle their financial futures.”

Here are a few key questions parents and other family members should consider for instilling financial discipline and investing skills for kids.

What's an ideal age to start teaching kids about financial literacy?

The sooner the better, Beck says, because it’s an ongoing process covering many years. Parents should teach their kids “progressively,” perhaps as early as the toddler stage.

Show kids that money “is a medium of exchange,” Beck says, and demonstrate the importance of saving and understanding needs versus wants. Parents can establish and build on these concepts as children gain the ability to absorb increasingly complex information.

Remember: set a positive example and act as a role model, without lecturing, and use your mistakes to illustrate lessons.

What kinds of lessons and where?

Any random trip to the supermarket or shopping mall can be an opportunity for parents.

“If your kids are old enough to tell you to buy them things at the store, they are old enough to start learning about money,” according to BusyKid, which offers a smartphone app for teaching financial responsibility to children. The key is finding “teaching moments.”

For example, during back-to-school shopping, point out that you’re using a credit card and explain some basics about how it works. “As they grow up, you will be able to have more in-depth conversations and ask what they understand about debit cards or loans,” says BusyKid.

Giving kids a weekly “allowance” is an old tradition. Is it still viable, or do we need to modernize it for the 21st century?

An allowance is still very much a good idea, experts say—but make sure you stick to the program.

It’s up to parents to decide when, how much, and how often an allowance should be given, says Beck. “It can be one of the most important tools for learning money management,” he says. “With guidance, managing an allowance prepares your child for having an adult income. “

Ideally, an allowance is awarded on a consistent basis—treat it as a “paycheck” for your kids. Don’t use an allowance as a reward or punishment, or as a means of control, Beck cautions, and “let your child make mistakes spending their allowance. Don’t bail them out.”

What are some simple steps adults can teach kids?

Again, coins in the old piggy bank is a good place to start—a way to demonstrate “equivalency,” as Beck says.

Continually reinforce that saving money is the way to get things we want, and that we have to prioritize spending for things we need. As a child gets older, getting them involved with a bank account can also provide valuable lessons.

Beck recommends six basic skills kids should have before they leave home: 

1. Setting goals  
2. Earning money   
3. Spending money wisely (budgeting)   
4. Understanding the “time value” of money (saving, investing, compound interest)     
5. Using credit responsibly     
6. Protecting assets

What about those “financial  vocabulary lessons”?

Whatever your child’s age, they can learn financial terminology, says BusyKid.

For example, the definition of “savings account” could be taught as early as age 4. “This is one of the easier ones for kids to grasp because it’s easily demonstrable,” says BusyKid. “Give your child two of his or her favorite treat during the day, and tell them they can eat one now, but to save the other in a special place.” Do this daily for a week, and then watch their reaction after they get the bag of saved treats at the end of the week, explaining that saving money works the same way.

“Budget” and “loan” could be taught around age 8. Many kids grasp the latter fairly easily, because at some point, they’ve probably lent something to someone and expected to get it back. Explain some of the reasons people decide to take out loans.