How to Start Financial Literacy for Your Kids
Summary: As the saying goes, rather than give a man a fish, teach him to fish and feed him for a lifetime. Empowering the young people in your family with financial literacy right from a young age sets them up for a lifetime of financial awareness. Start teaching your kids about the fundamentals of money, savings, and overall financial management today.
As an adult, you probably know how important financial literacy is to your daily life. Perhaps you’ve experienced the frustration of a low credit score, or the disappointment of being denied a loan. Maybe you’ve also had the pleasure of watching a small investment grow over time into substantial savings.
Understanding basic financial principles such as budgeting, saving, investing and managing debt can help you dodge common financial pitfalls and steer clear of poor spending habits. That’s why it’s never too early to learn about money.
Teaching your kids about money when they are young may help them build a broader perspective of what it means to earn and spend money. It may even help them avoid some of the financial mistakes you’ve made in the past as they get older.
With that, let’s look at why financial literacy for kids is important and how to teach it.
Understanding financial literacy
Financial literacy is understanding how money works and making informed and effective decisions regarding all aspects of your finances. It means having the knowledge and skills to manage your expenses, set financial goals, understand credit and debt, navigate the banking system, and recognize the importance of saving and investing for the future.
Financial literacy is important because it gives you the tools and resources to make sound spending decisions and achieve financial freedom. Teaching your kids about financial literacy helps set a foundation for responsible money management and future financial independence.
Setting the stage for family financial education
While some kids are ahead of their peers, most kids grasp money concepts between the ages of 6 and 8. Some kids will have cemented their habits by age 7. But the battle for their minds should start early.
A significant part of how children perceive money is rooted in how their parents manage and view money. By leading through example, you can instill in them the values of financial responsibility and independence.
Here are some ways you can guide your child’s financial education:
Budgeting: Introduce your kids to the concept of using a budget to manage earnings, savings, and spending. A popular budgeting rule is 50-30-20, where income is split so 50% of what you earn goes towards your needs, 30% on wants, and 20% on savings. You can also switch it up and devote 30% to savings and 20% to wants.
Spending vs. saving: To teach kids the benefits of saving money, encourage them to create a plan to save for something they really want. Consider giving them an allowance to build their savings. The rule of thumb on how much to give a child in weekly allowance is to pay $1–$2 for each year of their age. When they begin to see their allowance as ‘their’ money, you might find them being more selective about their purchases. They’ll realize that by saving their money, they can afford to buy something more meaningful or desirable in the future.
Borrowing: Once your kids understand budgeting, spending, and saving, it’s essential to teach them about borrowing, debt, and credit cards. Explain that while it’s best to spend only the money you have, borrowing can sometimes be necessary, such as when buying a car or a home. However, they need to know that borrowed money is not free money; it comes with the responsibility of paying back the loan, often with interest.
This might be a good opportunity to introduce the concept of interest, and how it can work for and against you. Another way to drive home the financial lesson of borrowing is to talk about paying for college.
With more families taking loans to fund this important milestone, financial literacy can help in two important ways: Firstly, the whole family can participate by keeping the goals realistic for everyone. Secondly, this can spur children into taking ownership of their finances, easing the load on parents dipping into their savings.
Investing: Investing is how families and individuals can help build and grow their wealth. Show your kids or grandchildren how they can get started investing by opening a custodial account on their behalf. Custodial accounts are often easily transferable once your child reaches a certain age. By tracking the performance of the investment account together, you can teach your child how investing works and help them understand the importance of long-term financial growth. Keep in mind, all investing involves risk, including the possible loss of principal.
Tools and resources for teaching kids about money
Many parents run ragged with their jobs, housework and caregiving responsibilities. It can be hard to find time for family financial education. Thankfully, there are a whole host of tools and resources available that not only teach kids about money but are also fun.
Here are a few tools and resources to help your kids improve their money skills.
- Consumer Financial Protection Bureau (CFPB): The CFPB’s Money as You Grow program provides various resources and activities for parents, caregivers and educators to encourage financial literacy for kids.
- Online apps and websites: GoHenry, Goalsetter, Greenlight and FamZoo are some websites that can help your child improve their money skills. These apps teach financial literacy for kids through hands-on money management tools and provide them with their own prepaid debit cards.
- Video games: Believe it or not, there is actually a video game designed to teach teens about credit scores, credit reports and saving. Night of the Living Debt is an interactive zombie video game created by the Learning Games Lab at New Mexico State University that can be downloaded onto an iPad.
- The Federal Deposit Insurance Corporation (FDIC): The FDIC also provides resources for parents, caregivers and educators on financial literacy for kids through its Money Smart for Young People program. The resources it provides include a Money Smart for Elementary School Students coloring/activity book and Money Smart News for Kids, a nine-part series with information on everything from opening a bank account to the power of compound interest.
Conclusion
Financial literacy for kids plays a critical role in helping them develop healthy money habits that can serve them well throughout their lives. When you teach kids about money concepts such as budgeting, saving, borrowing and investing, you give them the tools they need to become adults who make smart financial decisions and avoid common financial pitfalls.
By prioritizing financial education for your family, you enable your children to become financially savvy individuals who are well-equipped to navigate the complexities of their finances. At Mutual of Omaha, we’re keen to help you with the resources your family needs on its journey to financial success.
FAQs
Q1: What is the best age to teach financial literacy for kids?
The best age to start teaching financial literacy to kids is as early as possible. Teaching kids about money can start as early as age 3 when they learn about numbers. By the time a child reaches age 5, you can begin to introduce basic financial concepts like earning, spending and saving.
Once they are 6-10, you can set them up with a custodial bank account and teach them the importance of budgeting. Teenagers should have a good sense of the value of money and ideally, a small amount of savings put away through the years. Early financial education for kids can help them build a comprehensive understanding of financial principles and prepare them for financial independence in the future.
Q2: Should financial literacy be taught in schools?
There is some debate as to whether or not financial literacy for kids should be taught in schools. According to a survey by the Council for Economic Education, 35 states require high school students to take a financial literacy course to graduate. However, the best financial literacy for kids may come from their parents. Parents play a crucial role in financial education because children often model their financial behaviors.
Disclosures:
Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.
Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.
Not all Mutual of Omaha agents are registered representatives or financial advisors.
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