5 Financial Literacy Lessons Every Kid Should Learn
It’s been said that your budget and calendar best reflect what you value because it documents how you spend your time and money. If you think about how you allocate these precious resources, you (like most of us) will likely find room for improvement.
You are not alone. In the United States:
Most people are unaware of their spending habits. 65 percent of Americans have no idea how much they spent last month according to mint.com. Gen Z has the lowest awareness, with 77% stating they were unaware of how much they spent in the prior month.
Most people are in debt or barely getting by. In a 2020 survey conducted by the Federal Reserve, around 45 percent of adults spent more than or equal to their income. This means that this group is either in debt or not saving.
This awareness may have slightly improved during 2022 due to rising inflation, impacting prices of gas, food, and beyond. Regardless, the majority of Americans are not financially stable and live reactively.
The good news is that you are capable of eliminating that financial burden by learning and implementing financial literacy skills.
What is financial literacy?
According to Investopedia, financial literacy is the ability to understand and use various financial skills, including personal financial management, budgeting, and investing.
Financial literacy education is beginning to spread into some schools' curriculums, but is far from universal. That is why it is important to introduce these money management lessons at home. Since most people didn’t formally learn about personal finance, the first step would be to educate yourself, using YouTube or classes like Financial Peace University. The best way to teach your kids financial literacy and any other skills is by modeling this behavior at home.
Why is it beneficial to teach kids about money?
Did you know that money habits in children are formed by age 7? If you have been putting off teaching your kids about money, this is a great reason to begin. If you’re still not convinced, there are 3 other benefits of teaching your kids about money.
● Stable Relationships - Children who learn solid money habits from their parents have more fulfilling romantic relationships as young adults. Research from Dr. LeBaron-Black found that these children tend to save and budget, leading to less stress about money, which alleviates financial pressure on the relationship.
● Executive Function Skills - The act of saving money for a big purchase is one way for kids to practice executive function skills, including impulse inhibition and delayed gratification.
● Minimized Stress - If you teach your children to save money in an emergency fund, they will be calm and collected when life’s inevitable emergencies arise. Cars eventually break down and unexpected ER visits happen.
How can we implement financial literacy lessons at home for all ages?
Five tips are listed below, along with examples to inspire practical ways to teach kids these lessons. Using 2 made-up examples, Jimmy (age 5) and Rachel (age 16 who works a part-time babysitting job) can help guide you maneuver this topic.
Lesson #1 - Money is finite.
Vocalize that money is limited and takes effort to earn. The fact that money is finite can be a good thing. Based on the American psychologist Barry Schwartz’s book “The Paradox of Choice”, he argues that an abundance of options requires more effort to make a decision and can lead to dissatisfaction with that choice. In essence, more choices can lead to more anxiety.
In practice, this means saying “No” to some of your child’s requests for toys or activities, even if you have the money to get them. When teaching your kids about money, aim to give them small amounts to manage until they become mature enough to manage more.
Examples:
Jimmy (age 5) needs to hear the word “No” when he asks for certain toys you deem unnecessary. A gentle way to do this is by saying “Money is limited so we cannot afford a $30 toy, but we can go to the Dollar Tree and buy 2 toys.”
One way to teach this to Rachel (age 16) is to establish the boundary that you will cover her needs, but she is responsible for her wants. You can reinforce the reason behind this is because there is a limit to the money you have.
Lesson #2 - Live debt free and below your means.
Make sure income (money earned) is lower than expenses (money spent). In other words, this means not getting into debt (borrowing money). Although our society deems debt normal, the concept of borrowing money from a lender has only become popular in the past 70 years. Student loans started in 1965 and credit cards began in 1950.
Living without debt gives you the freedom to spend money however you desire, rather than relying on your paycheck to pay back loans. The one form of debt that most financial experts deem acceptable is a mortgage, as this asset accrues value over time.
Examples:
Let’s say Jimmy (age 5) spent all his birthday money on a new toy but now wants another new toy. He is willing to borrow money from you and pay you back. This is a good teaching moment to instill that if he doesn’t have the money, he can’t buy the toy. Suggest extra chores he can do around the house to earn the money for the toy.
Rachel (age 16) wants a new laptop that’s worth $1000 and has $500 saved so far. She keeps begging to get a credit card to finance the rest. Introduce the concept of interest by showing her that if she were to spend the remaining $500 on a credit card and make minimum payments of $20 at 19%, she would eventually pay back $688, so $188 extra dollars going to interest. This will likely fuel her desire to pick up extra babysitting shifts to get the laptop faster.
Lesson #3 - Give, Save, and Spend in that order.
Assuming all debts are paid (if any were accrued, to begin with), the best order to manage your money is to Give first, Save second, and Spend third according to Christian financial expert Dave Ramsey. Why? To raise kind and generous future adults, the concept of sharing is vital. In the Bible, we are instructed to give our firstfruits and then manage the rest. Although many people believe in giving 10% to their church, you can customize this to what works best for your family.
Tangible cash is an effective way to learn about saving and money growth for kids. A study from the Journal of Experimental Psychology: Applied found that it’s psychologically more painful to pay with cash over a card, likely because you are physically handing over your tangible cash.
Since most humans are visual learners, it will be helpful to see savings grow by using a clear glass jar. Have your older kids save for an emergency fund first. You can choose the appropriate amount, but the idea is to have them be able to cover an unexpected expense, like a car breaking down.
Lastly, spend. Now that you have prioritized how you will give and save, you can manage the remaining money to spend on variable and fixed expenses. Fixed expenses are recurring payments that are the same amount month after month (like a mortgage). Variable expenses include food, gas, and shopping, and can “vary” greatly.
Examples:
Let’s say Jimmy (age 5) has $20 cash. You can guide him to physically give the money at Church (if you are a believer) or buy a friend a toy first ($2). Then, you can get a glass jar for savings so he can see the money grow ($10) for that expensive bike he has been wanting. Lastly, he can keep the $8 to spend when shopping.
When Rachel (age 16) tells you she wants to buy a car, you can advise her that with each paycheck she earns from babysitting, she can first give, then save for an emergency fund first and for the car second, and then spend. Since she is living at home, she may opt to not keep any spending money. Let’s say she wants a car that’s worth $10,000 to buy 2 years from now. She will need to save $417 per month to reach her goal.
Lesson #4 - Establish “money boundaries” to avoid impulse purchases.
If you tend to overspend impulsively, implementing a boundary of waiting 24 hours for purchases over $100 could help. In essence, a money boundary can act as a buffer to make you pause in areas you tend to overspend.
Other ideas for “money boundaries”:
When eating out, skip delivery fees by picking up takeout or eating at a physical restaurant.
Stick to your grocery list. If it’s not on the list, it can’t go home with you.
Consult with one other person before making large purchases (over $500).
Examples:
You can establish the money boundary that Jimmy (age 5) can spend money only on weekends for example.
For Rachel (age 16), you can have her consult with you on any purchase over $100. The idea is to advise her to make the right decision on her own.
Lesson #5 - Have a written budget and track what you spend.
Photo Courtesy of Ramsey Plus
A budget documents how much you plan to spend, save, give, and in what categories. The components of a good budget are:
Putting Giving first, Saving second, Spending third
Budget before spending happens. The ideal budget is done per paycheck so if you get paid once a month on the 20th of the month, you can set up your budget days before this and update it throughout the month.
Include a “planned”, “actuals'', and “remaining” column to see if you have overspent or underspent in any categories. When first starting, it’s best to update it often.
The method you choose to budget is up to you. Many people prefer mobile apps like Mint or EveryDollar, some like Excel, and others prefer pen and paper.
Examples:
Jimmy (age 5) can budget by using the envelope system and a glass jar for savings. You can label 2 envelopes with giving and spending, along with a jar for saving.
For Rachel (age 16), you can help make her first budget using her preferred method of pen and paper. Then in a few weeks, update the “Actuals” column with her to see where she overspent or underspent. Keep in mind that budgeting is not set in stone. If she overspent on a category, it’s possible that the budgeted amount was unrealistic and can be adjusted.
One of the most vital life lessons, managing your money, happens to be a skill that few formally learned about. Thankfully, this is changing in Florida thanks to the Dorothy L. Hukill Financial Literacy Act, which requires high school students to take a personal finance class before graduating. This will go into effect during the 2023-2024 school year. Though this is a step in the right direction, it is optimal for parents to introduce these money management skills at home