Financial literacy is the ability to use knowledge and skills to make effective and informed money management decisions. Personal financial literacy covers a range of money topics – from the difference between needs and wants to asset allocation for retirement. While literacy – the ability to read and write – is a central part of the education system, financial literacy is often left out of the equation: in the United States, fewer than half the 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.
Studies show the result of this education gap is that most kids do not know enough about money and money management to grow up to be financially responsible adults. The President’s Advisory Council on Financial Literacy wrote in its 2008 Annual Report to the President: “By almost any measure, today’s schoolchildren are ill-equipped to understand personal finance and make their way in the modern financial world. Their rising debt and debt problems, along with their poor inclination to save, substantiate what the test scores show. Meanwhile, most students still graduate from high school without any formal classroom education in personal finance.”
Because most schools do not require or even offer adequate money management courses for children of any age, the job of financial educator falls primarily on parents and guardians. Adults have experience and perspective on their sides, and even those who lack confidence regarding their own money management skills can teach children valuable lessons. Financial coaching can occur anytime and anyplace, and repetition is valuable. For example, you could teach your child about credit cards and reinforce concepts by:
- Having a discussion to introduce credit cards, explaining how they work and encouraging your child to ask questions;
- Taking advantage of a teachable moment when you take out your credit card to pay for a purchase;
- Showing your canceled check made out to your credit card company to pay your bill (this associates that little piece of plastic with actual money);
- Showing your child the section of your credit card statement that indicates how long it will take you to pay off your balance – and how much you will pay in interest – if you make only the minimum payment each month; and
- Discussing the many offers for credit cards that you receive in the mail, making sure to explain why the companies want your business.
Children are ready to start learning about money at a very young age. By age three, most kids understand that money can be exchanged for something they want, and most four year olds associate the collection of coins in the piggy banks with the concept of saving. Because every child has a unique learning style and will learn at a different pace, it is important to be mindful of each child’s needs: one child may immediately understand and be ready build on a concept, while another may need more examples and further explanation. It is helpful to think of financial literacy as a lifelong learning process, rather than approaching it simply as a checklist. Keep in mind, the information you impart is important regardless of your family’s past, current or future economic situation. The need for good money management skills applies to everyone – the wealthy, those in low-income brackets, and everyone in between.
In our first guide, Teaching Financial Literacy To Kids, we introduced topics that are appropriate for the youngest learners – such as what money is and the difference between needs and wants. Here, we cover financial topics for tweens – children who are between the ages of eight and 12 – including income and expenses, what to do with our money, saving for long-term goals, entrepreneurship, saving for a rainy day and how to protect our identities. For more on what to teach to teenagers read Teaching Financial Literacy To Teens.