February 1, 2009
Financial Literacy 101
How Parents Can Help Children Learn to Manage Money
By Mark Heller
How do I get my child to truly understand the value of a dollar?
When should I start giving an allowance?
Should I get my teenager a credit card?
Oh, the questions that surround the process of bringing up financially literate children! Of course, babies are not born with the skill set that makes them appropriate money managers. If we want our children to be good at making spending, saving, and giving choices throughout their lives, we must commit to teaching those skills throughout childhood, adolescence, and even adulthood. Starting early with your children, and maintaining some consistent attitudes and habits over many years is probably the best way to ensure that they will understand the value of money and how to make it work for them. It is never too soon to start teaching financial literacy.
Here is a set of age-appropriate money skills every family can teach:
Pre-School Through Primary Years (As Soon As Your Child Can Count)
- Knowing and naming coins and dollar bills
- Learning that money is traded for things
- Learning to keep money in a safe (but memorable!) place
- Learning that we can’t buy everything, so we have to make choices (and that there is a big difference between needs and wants)
- Learning that after we spend money it is gone
- Early money management skills: Money has three main purposes — spending, saving, and sharing
Ages 6 – 8
- Learning coin values and solving addition and subtraction problems using coins
- Learning that banks keep money safe until we need it
- Reinforcing that there are three things we use money for: spending, saving, and sharing
- Beginning an allowance. (Strive to give the allowance in denominations that allow for easy saving. For example, give five one-dollar bills instead of one five-dollar bill. That way, your child can easily put an appropriate fraction of the allowance into the savings pot.)
- Planning purchases and gifts, having goals for how you will use your money
Ages 9 – 11
- Making change and calculating tips
- Opening a savings account and making deposits and withdrawals
- Learning about checking accounts and that checks are written against existing balances
- Comparing prices when shopping, including unit pricing
Ages 12 and Up
- Learning that interest is the “rent” charged for the use of money over time
- Learning the power of compound interest
- Understanding that credit cards involve high-interest loans
- Understanding how mortgages work, including how paying extra principal significantly reduces the long-term cost of the asset
- Understanding how to build and maintain a strong credit rating (i)
Some Things to Try
- Consider charging interest on loans made to children and paying interest for money saved at home.
- Buy a 12-month file and populate each month with an envelope for that month’s savings. If your child meets a savings goal, let her/him make the pre-planned purchase.
- For years, my wife and I have shared the statements from each child’s college savings plan (“529 Plan”) with that child. We show the monthly contribution and how the balance is growing through the investment of the steady contributions.
- Before sending students off to college, try giving your teenager a month’s budget for clothes, food, entertainment, etc. Let her/him spend it as they choose. When the money’s gone, it’s gone. You have to be strong, but your teen may learn some valuable lessons before the costs dramatically increase. (Maybe you should try week by week first!)
To answer the third question posed at the start of this article: I do not recommend that teenagers be given credit cards. Credit cards have a way of stimulating impulse buying in all consumers, and most teenagers don’t yet have a positive relationship with impulses. Try debit cards instead. You can load them up with balances that might help teenagers better understand their limits.
Judging by Americans’ woeful savings rate, the mountains of credit card debt that we collectively face, and the recent foreclosure crisis, we and our parents did not do a very good job of educating this generation of consumers on financial matters. If we can help the next generation of Americans be better than ours has been, we will no doubt be helping our country to a healthier and wealthier future. Financial literacy is our patriotic duty!
Reference:
(i) Iowa State University: Financial Skills Need to be Learned
