Financial literacy is the ability to use knowledge and skills to make effective and informed money management decisions. Personal financial literacy encompasses a range of money topics, from everyday skills such as balancing a checkbook to long-term planning for retirement. While literacy – the ability to read and write – is a fundamental part of the education system, financial literacy is often left out of the equation. In the United States, fewer than half of states have any financial literacy requirements for their K-12 education systems, and only four states require high school students to take personal finance classes.
While there is a movement to include more finance-related coursework in elementary, middle and high school settings, parents and guardians are the primary educators when it comes to teaching children the skills they need to develop a strong foundation for life-long financial competence. Many adults, however, avoid talking to kids about money, because they lack confidence in how they’ve handled their own finances. This is unfortunate, because adults have two things that children do not when it comes to finances: experience and perspective. You do not have to be a financial rock star with a perfect track record to teach your child personal finance basics and get the money conversation started. If your finances are currently in a mess, you can work to get them in order and be a positive role model.
Like other provocative topics, money is something that kids will hear about outside the home – at school, summer camp, sports practice and at friends’ houses. While this may sound harmless (what could they possibly hear that could be that bad?), kids can get the wrong message about money by getting information from their peers. For example, your child might hear a classmate say that rich people are lucky. If your child believes that wealth is a result of luck, what motivation will he or she have to handle money responsibly? It’s important to clarify at a young age that most wealth is not a result of luck – that most people work hard and make smart decisions to “get rich.” Even if you don’t know the difference between defined benefit and defined contribution pension plans, you can provide accurate information, introduce ideas, spark interest and awareness, and help empower your children to take control of their financial lives.
By teaching your children about money, you help them discover the relationships between earning, spending and saving. In doing this, children also begin to understand the value of money. This financial literacy can begin at a young age with simple money concepts such as counting coins and making change for purchases. Older children can learn about savings accounts, balancing a check book and creating a personal budget. The key is to teach a concept and let them try, even if it means a little extra time in the toy store while your little one painstakingly counts out coins from his or her piggy bank.
In this tutorial, we will introduce key financial concepts that are appropriate for young children, including tips for getting kids to think about and understand the topics. For information directed toward older kids, check out Teaching Financial Literacy To Tweens, or for topics specifically for teenagers read Teaching Financial Literacy To Teens.