Financial literacy is like learning a language: the earlier you start, the easier it is.
Children start gaining a grasp on the financial world in middle childhood (around age 6), though a parent's responsibility to establish a strong financial foundation for their children begins even earlier.
If you’re a parent, there’s one tried-and-true way you can prepare your children for a healthy future: Teach them the importance and value of money early on. How? Start by following conventional wisdom: Play games that enforce positive money lessons, take advantage of teaching opportunities such as how to comparison shop for groceries, hold regular discussions about the difference between spending and saving, grant children an allowance for chores completed, etc.
There are countless other ways you can help your child become financially literate and establish good habits, such as reading finance-centric books together. You can also look into programs such as Fifth Third's Young Bankers Club by contacting your area's Community & Economic Development Officer. Read on for more suggestions regarding how you can teach your child financial literacy.
Model behavior
Personal finance blogger Doug Nordman of The Military Guide said he and his wife started teaching their daughter about money as early as possible. But instead of simply having conversations about money and how it influences their family, Nordman felt the best way for his daughter to learn was for her to observe their actions—to see the impact of money decisions instead of just hearing about them.
The research backs up Nordman’s claim. It’s not enough to explain why credit card debt is bad; you have to actively avoid racking up debt of your own if you want your child to learn the lesson.
“The modeling of behaviors by adults is a powerful means of supporting learning in children,” the authors of a report from the Money Advice Service found. “Moreover, the propensity for inductive learning in young children also explains why learning from experience is more powerful than learning through instruction.
Start saving ASAP
Even before a child is old enough to work, they’ll likely receive cash from odd jobs, birthdays and holidays. As soon as this becomes a trend, parents should instill the value of saving. For example, parents can open a Minor Savings account in the child’s name for long-term goals and teach kids the value of hard work with an allowance awarded for chores completed.
Older kids who want to save for a car or trip abroad can start a Goal Setter account, which provides a bonus when account holders meet their savings goal. Earning a bonus can incentivize your kid to set a specific goal and stick to it, even when they're tempted to make an impulse purchase such as the latest video game console.
Parents can keep kids involved in budget decisions
Including children in budget discussions can help them understand that money is not unlimited. For example, you could talk to your child about vacationing and how you need to stay under budget on an upcoming trip to their favorite theme park. Consider setting a specific budget for various activities, such as a souvenir budget, that directly involve children. That way, if your child asks to buy a stuffed animal, parents can discuss with the child how that affects the amount they are allowed to spend on souvenirs overall.
Another way to demonstrate the power of budgeting is to give your kid a certain dollar amount and tell them to find the cheapest product they can afford within a certain category. The amount you give should be enough to cover the cost, but if your child finds a better deal by comparison shopping, they benefit by keeping the difference.
In addition to the gratification children can earn by saving money for themselves, saving money to give back to a charity or community-focused organization can help them build a sense of responsibility and gratefulness. Studies show that those who donate money to worthwhile causes feel a sense of gratitude for what they have, which is a powerful moral lesson for kids to learn.
Learn why long-term saving is important
Kids in their early teens can learn about compound interest and the power of investing through the stock market. Parents eager to learn as well can get help from an investment advisor.
Saving early for the long-term and earning compound interest can dramatically affect a child's future wealth. Older-aged kids can learn how a dollar saved today can grow exponentially over the course of several years by experimenting with the Securities and Exchange Commission's compound interest calculator.
Learn to let go
Nordman said one of the hardest things as a parent is allowing your kids to make mistakes. But teaching positive habits, and allowing your children to learn from failure, is vital before the stakes get high.
“Parents have to mentally prepare themselves by imagining their kids running around lighting $20 bills on fire and waving them like 4th of July sparklers,” he said. “If parents think this is scary with 7-year-olds, wait until their kids are teenagers.”
By starting to teach your children financial lessons in their early years, you'll build a strong foundation they can rely on for the rest of their lives. Start with these tips and you'll be well on your way to establishing a strong sense of financial responsibility in your children.