Financial Literacy and Your Children
April is Financial Literacy Month, so what better time to talk about your children and personal finance. Did you know that less than nine states require testing of student knowledge in the area of personal finance? Or that only 25 states require curriculum in personal finance be offered to high school students? This is according to a bi-annual report from the Council for Economic Education. Many people are opposed to teaching financial education within the school system, as they believe it is the parent’s responsibility. What this means to parents is that teaching their children about personal finance is of the utmost importance. The good news is that when you talk to your children about personal finance, not only are you preparing them for adulthood, but you could give your financial plan a boost. So, what’s a parent to do?
Here are four important things you can do that will teach your child to be a critical thinker in the area of personal finance. This will not only help them be better prepared to get into the college of their dreams, but also help fund that college education.
1. Discuss needs versus wants – teach your child(ren) to be critical thinkers around money by introducing the concept of need versus wants. Examples are helpful, so have a few in mind before beginning the discussion. Sports provide a great framework and make easy examples they can relate to. Take soccer for instance, players are required to have cleats and shin guards (needs), but many kids want special head bands or wrist bands. Explain to the child that one is essential, i.e., it’s required, and they’ll be kicked off the field without them versus the other is a want, a “nice to have,” but will not result in them asked to leave the field if they don’t have the item.
2. Allowance; YES! Tie it to household chores; NO! – it’s important for children to be a part of the household and learn pride in taking care of their home and surroundings, no doubt. And, invariably, children will push back, not do what’s been asked of them, or otherwise buck the system (even if only initially). The problem with tying allowance to the completion of chores is that when they don’t perform the chores, they lose the opportunity to learn their critical thinking lessons about money. Indeed, a consequence for not helping around the house when asked to do so needs to be levied, but I suggest using something other than cash. For example, using time with friends, their favorite electronic item, or anything viewed as a privilege, instead. That way when you have to follow through and withhold something, it’s not the opportunity to learn important financial literacy lessons.
There are a variety of ways you can set the allowance amount, but here are some guidelines to keep in mind as you consider the amount. First, make sure it’s an amount YOU can afford to give them that fits into your monthly cash flow. It shouldn’t be so much that they are able to be frivolous and aren’t forced to make choices. But it should be enough that they have the opportunity to consider their “wants” and are in turn forced to prioritize those wants.
As a practical example, I gave my children a weekly allowance equal to half their age, so my 10 year old son received a weekly allowance of $5. However, once he hit the teen years, I adjusted the amount (and the responsibility i.e. learning opportunity), to a larger amount, and now my 13 year old gets $13/week.
3. Set an “Income Policy” – Here is where you can really benefit your child and instill important values that will benefit them their entire life. Teach them the value of saving. In today’s world, instant gratification is all around us. By learning to save, children are introduced to the concept of delayed gratification. The benefits of delayed gratification are well understood and most famously reported in the “Stanford Marshmallow Experiment” (for more about the study click here). The amount of saving isn’t what’s important (at this stage), but rather the concept of saving.
Example, I require my children to save 10% of every dime they get, be it from allowance, gifts, or earnings from helping a neighbor. They have a piggy bank that the “savings” goes into immediately upon receipt. We’ve talked about the reason and situations when they can access their savings (example: annual family trip, big ticket items like a bike, etc.) By enforcing this savings policy, children learn about “delayed gratification” and begin to develop a very beneficial habit.
Other “policies” can be a great way to teach values you’d like to instill in your child(ren). As an example, I want my children to be charitably inclined. So, I require them to set aside (another) 10% of every dime they receive in the “charity” bank. Each December, we talk about how much is in the bank, and how they’d like to help make a difference in the world. Things we’ve discussed in the past include: adopting a family at Christmas, purchasing toys to be donated for a toy run, and a cash contribution for the SPCA.
4. Let em’ fail, and then discuss it – money mistakes are an important part of the learning process. I’ve watched my children spend their entire allowance on the first day they get it, on the dumbest thing (in my opinion) in the toy isle at Target, only to complain at the end of the week that they have no money when it comes time to have some weekend fun. The important consideration here is not to make your child feel bad or shameful about their choices, but rather to use it as a teaching moment. Help them see where their previous choice has led them to not having money later. To consider, did that toy really provide the gratification they wanted, or would a different choice serve them better next time. As they begin to practice with their allowance, they’ll sharpen their notion of needs versus wants and learn about choices. It’s far better for your child to spread their wings and learn while at home than it will be when they are out on their own when the stakes are much higher.
Talking to your children about money and personal finance can be intimidating, but it can also be great way to connect and have fun with them. You might even find that those trips to the store are a little more enjoyable for all of you. The fact that our state education systems are not requiring personal financial concepts be taught in every school, only highlights the need for the discussion to happen at home.
The items listed below are fun, age-appropriate activities to engage in with your children:
Elementary school age – Play The Allowance® Game
Middle school age - JA Programs | Junior Achievement of Sacramento
High school age - Jump$tart's Reality Check - Jump$tart Coalition (jumpstart.org)
For more information about children and personal finance:
