Helping Your Kids Become Financially Literate
Please note that this article was originally featured by our CEO, Marguerita Cheng, on CFP Board’s Let’s Make A Plan Blog.
Parents would not dream of raising illiterate children - so why does it seem that to many parents, financial literacy is less of a priority?
As a Certified Financial Planner™ professional and mother of three, I believe that teaching children how to manage money is one of the most important responsibilities parents have.
Living in a consumer culture where delayed gratification seems like an outmoded concept, it’s not easy to keep kids financially grounded. However, by providing our children with firsthand experience in earning, saving, and spending money, they are more likely to develop a savvy sensibility and the framework necessary to manage their personal finances as adults.
Financial Literacy Is a Lasting Legacy
Financial literacy involves understanding fundamental financial concepts, such as compound interest, the time value of money, the use of consumer credit, diversification, tax-preferred savings vehicles, consumer rights, and more. Having this knowledge supports our ability to make prudent financial decisions throughout life and to respond competently and confidently to the inevitable financial uncertainties that we all face.
Since financial education is a natural contributor to economic success, I am passionate about helping my children understand the value of financial stewardship. I want them to be able to differentiate between needs and wants. I focus on teaching my children sound money-management skills that will serve them well throughout their lives. Finally, as a CFP® professional, I want to encourage fellow parents to do the same.
Four Tips for Teaching Kids About Money
There is no greater wealth than knowledge, and no greater poverty than ignorance.
— Ali ibn Abi Talib
With the goal of financial literacy in mind, consider these four strategies to help teach your children how to best manage their money. They are simple and effective, even for children still in elementary school.
1. Create a financial mission statement for your family. Solicit input from your family about what each member thinks is important. Is it eating out, taking vacations, saving for college, or all of these goals? Have an open conversation with your spouse and children to encourage them to think about the meaning of money, the challenge of earning it, and the importance of saving for what they truly value.
2. Take opportunities in your daily activities to model how you make spending decisions. By discussing money-making decisions as you shop, cook, and pay bills, you provide concrete examples that your children can model. Plus, taking the kids to the grocery store and cooking dinner afterwards teaches them to apply their math skills in the real world.
For example, having them bag groceries with you at the checkout shows them how much it really costs to fill up the fridge each week. You might encourage them to compare the costs of the meals they help prepare at home to what the meals might cost at a restaurant or fast-food establishment.
3. Give your kids opportunities to earn money. Consider the idea of paying an age-appropriate allowance to your kids. Whether you believe that it’s better to tie an allowance to doing chores, or to give a small stipend without conditions is a matter of constant debate. Either way, an allowance is a great way to teach kids how to handle their own money. My daughter Sarina, who just graduated from high school, has worked as a swim instructor, lifeguard, and math tutor.
Earning money has given her an understanding of how much she needs to work to pay for things she wants. This summer, she realized that by not taking a full hour for lunch, and by lifeguarding for 30 minutes during summer camp, she was able to earn an extra $10 a day! While the extra money was a tangible benefit, Sarina’s extra lifeguarding was valuable to the camp director, too, because it enabled her to accomplish other tasks.
4. Allow children firsthand experience in saving and spending their own money. Open a savings account for your children early, and consider allowing them to manage the records. They can monitor their savings activity over the years. By the time they become teenagers, the benefit of saving regularly over time will be apparent, because they will have some money to spend on clothes, food, and friends – and still save for college. And by the time they head off to the university of their dreams, they will be more likely to have a savvy sensibility about managing their expenses.
One of the hard parts of giving children some control over their own money is that they are sure to make some mistakes. It is important not to rescue them from every mistake! Children need the benefit of making their own decisions. By learning from their mistakes, they become adults who can manage their money well.
The Bottom Line
As 7th century Muslim sage Ali ibn Abi Talib espoused, “There is no greater wealth than knowledge, and no greater poverty than ignorance.”
