In simple terms, financial literacy means knowing how to make smart money decisions— and it could be key to a healthy financial future. That’s why teaching kids financial literacy from a young age can be so important.
“We start talking to our kids at an early age about things like nutrition, safety, and teamwork because we want to instill good habits in our children that will last a lifetime,” noted Liz Frazier Peck, Certified Financial Planner, and author of Beyond Piggy Banks and Lemonade Stands: How to Teach Young Kids About Finance. “Finance should be included in these conversations.”
Exposing kids to financial concepts gives them the opportunity to practice, learn, and make mistakes when there are no real consequences. Peck said, “Once they are 18, they will start making real-world decisions, so they need to have a solid foundation before becoming an adult.”
Fortunately, it can be relatively easy to include financial literacy for kids in your everyday life by incorporating activities that can be modified to your child’s age and stage. Here are some ways to get started teaching financial literacy:
Table of Contents
- Use an allowance to teach kids about budgeting
- Create a family bank
- Introduce borrowing concepts through family lending
- Start early with real financial products
- Show your kids how you budget the family income
- Explain the importance of an emergency fund
1. Use an allowance to teach kids about budgeting
Scenario:
Your child earns a small amount of money for doing chores around the house. The complexity of the chores and their payment increase as your child grows. Eventually, your teen might look for a part-time job to boost their cash flow.
Personal financial literacy principle:
Budgeting might sound boring until kids learn about how it can help them save for things they really want. “Allowance is one of the best ways to teach kids about money because having some ‘skin in the game’ teaches them responsibility and accountability,” Peck said.
Activity examples:
- Show your young child how to save a small amount for a cause they care about and spend the rest on a small toy.
- Introduce your teen to a more complex budgeting formula like the 50/30/20 rule or a “Spend/Save/Donate” approach. Peck suggests they practice by splitting up their money into these different uses every time they receive it.
2. Create a family bank
Scenario:
Your child finds that money burns a hole in their pocket or they are unable to keep track of how they spend it.
Personal financial literacy principle:
Banks (even the “bank of mom or dad”) allow your kids to keep their money safe and out of reach through savings accounts and other products designed for longer-term savings. And, as a bonus, the money can earn interest.
“When kids are younger it helps to have tangible money in a piggy bank, so they can interact with it and watch it grow or shrink,” Peck said.
Activity examples:
- Show your elementary school child how to track their incoming money with an app or a notebook where they also record how they spend it.
- For your teen, offer interest that accrues the longer they leave the money with you, as a way to encourage saving.
3. Introduce borrowing concepts through family lending
Scenario:
Your child comes to you about a purchase they want to make, such as concert tickets or a pair of sneakers that are on sale. They don’t yet have enough money saved and the purchase is not in the family budget.
Personal financial literacy principle:
Borrowing money lets them fulfill an immediate need or want but also teaches them that doing so comes with responsibilities.
Activity examples:
- For kids in the 10- to 14-year-old age range, set up payment terms and a schedule you can stick to, with a consequence for a missed payment. “Determine a realistic payment schedule so you are setting them up for success,” Peck said. She recommends keeping it simple by either dividing the total so they pay it back in a set number of months or pay a set sum like $20 a month.
- With teens, you can also include a small amount of interest so they see that borrowing isn’t free. But first, explain how interest affects the total cost of borrowing. Then ask them if they would rather borrow the money or wait until they save up enough to make the purchase. You can even introduce credit scores: Explain what they are, and then create a mock “credit score” for them to show that reliably paying you back can earn them better terms and bigger loans.
4. Start early with real financial products
Scenario:
A family bank may work well for many situations. But you may also want to get your kids comfortable with real financial products from a young age.
Personal financial literacy principle:
Financial tools like bank accounts, credit and debit cards, and savings apps can enhance your child’s financial life when they are used wisely.
Activity examples:
- Let toddlers and elementary school-age children see you use real cash so they can better understand what things cost.
- Give a teenager a pre-loaded debit card so they can get used to plastic. Just be sure to discuss which expenses they are responsible for.
- Once they have shown they can act responsibly, help them open a checking account and discuss how debit cards work (compared with credit cards). “Explain that they have a certain amount in their account, and they can only spend what they have, much like a piggy bank,” said Peck. She recommends that parents and kids review balances and transactions together on a regular basis.
- Add older teens as authorized users on your credit card account and discuss when and how it can be used.
5. Show your kids how you budget the family income
Scenario:
Most kids grasp the need to pay for shelter, food, clothing, and other tangible items. But they might not be aware of the need to pay for things like insurance, internet, and cell phone plans.
Personal financial literacy principle:
As they learn to budget for themselves with their own money, it’s important to see what their lifestyle costs and understand why you might say no to certain purchases.
Activity examples:
- Show your kids how the bills fit into your family budget and how you decide what goes into your 50/30/20 buckets.
- Let younger kids help you allocate some of your “wants,” such as dining out. For example, if you have $100 designated for that category, they could choose to go out for ice cream every week or have a sushi dinner. Tweens and teens could help plan vacation spending.
6. Explain the importance of an emergency fund
Scenario:
Unexpected expenses might not be a specific line item in your budget. But you can discuss how best to handle them.
Personal financial literacy principle:
An emergency fund allows you to pay for unexpected expenses without using a credit card that could accrue unwanted interest. Peck recommends calling the emergency fund a “Just in Case” fund. In other words, this is money you set aside just in case you need it.
Activity examples:
- For a younger child, point to a real-life situation: Maybe the brakes on their bike recently broke. “Explain to your child that fixing the bike costs money, and since it was an unexpected expense, you used the “Just in Case” fund,” said Peck.
- With older teens, connect it to one of their surprise expenses, like a speeding ticket or a last-minute invitation for a road trip. Or you could point to one in your life, such as a fridge on the fritz or a pet that needs veterinary care.
Money isn’t a game, but teaching financial literacy for kids through fun activities can make the experience memorable and engaging. The great news is that it’s never too early or too late.
And if you need to brush up on your own financial literacy education, read our article on budgeting.Learn How to Budget Your Money in 7 Steps