Financial literacy for kids: 5 tips for how to teach kids money management

Today, it’s important to teach financial literacy for kids. In my day, even if your parents didn’t explicitly teach you about personal finance, money lessons were inherent to life:

Allowance for kids and babysitting jobs were paid in cash.

Savings accounts meant coins and wadded-up singles deposited into piggy banks and the local bank branch.

Charity meant writing a paper check (remember those?!) to an organization, or dropping bills into the collection plate at church.

Paper receipts were collected for future scrutiny. Carelessness meant that you forgot your cash in the back pocket of your summer cutoffs.

Today, money is something else entirely.

Money is digital. Plastic cards are swiped, receipts foregone.

Allowances can and are paid by bank transfer, and savings accounts may or may not net paper statements mailed out monthly.

The fact that so many financial transactions are digital has led to adults’ poor money habits — consumer debt is on the rise, savings and investing rates far below ideal. It is not surprising that a survey by National Financial Educators Council found that about half of adults say they received no financial education from their parents (and for those who did, slightly more got their money lessons from their moms than their dads).

If you — like me — are on a mission to teach your children how to be smart earners, savers, and spenders, this is a whole new world, one in which personal finance lessons to kids are being reinvented as we speak.

How do you explain financial literacy to a child?

Financial literacy is one part age-appropriate lessons and exercises (save, spend, give jars, earning money for chores, etc…), and two parts modeling great financial behavior yourself (creating and living within a budget, conscious shopping and spending, regular investing and thoughtful giving). 

When teaching money management for kids, at what age should you start?

Experts say you can start teaching money management ro kids as early as 2 or 3 years old, though they are watching everything you do, starting at birth! Money management for kids can include simple things like expressing gratitude for your food or clothes, giving at church, having a casual discussion about why you choose not to buy everything you want.

Financial literacy for kids in elementary school — 4 money lessons

1. Go paper for allowances for kids

When kids are small, only physical manifestations of money resonate with them.

When should you give kids an allowance?

Kids as young as 4 can and should be given an allowance.

In my family, my kids got $1 per year of age (so my 8-year-old gets $8 per week, etc.).

Pay this money weekly, in cash.

There are hot debates on blogs and in Facebook groups about whether parents should pay their kids a salary, exchange allowance for chores done, and which chores are age-appropriate.

In my house, my kids have regular chores (tidy room, feed cat, clean rooms, take out trash, laundry), random chores that I make up as they need to be done (run to the post office, clean cat litter), and failure to do so have their own consequence. Allowance is separate. This works for my family.

Part of identifying a money message for your family is digging into your own values around the topic. You will likely have your own program when it comes to chores and allowance, and as long as you communicate it with your children and your partner and you consistently enforce it, you're doing great.

2. Create spend, save and give jars

Buy clear jars (so they can see their stash grow), and label them: Spend. Save. Give.

This sets a clear message from very early on the important parts of money.

In our house, half the money goes in the ‘Spend,’ jar, 25% goes in each the ‘Save’ and ‘Give’ jars.

Gifts for birthdays and holidays can go where the kid chooses.

Every month, we collect the money in the ‘Give’ jar, and the kids select a charity of their choice.

This is really fun, since you can align your kid’s interest with a charity.

For example, my son is really interested in cheetahs, so he gives to the Cheetah Conservation Fund.

My daughter was upset by the number of homeless people she saw in our city, so we found an organization that supports that population.

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3. Talk about money with your kids

Every day you make financial transactions.

Just talk about things as you do them — even if you don’t think your kids understand.

“I’m choosing this milk over this milk because it is on sale, which means it costs less money than normal.”

“I know you want to go to the amusement park, but that costs a lot of money, and I am choosing not to spend that money right now.”

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4. Teach very young kids about investing

It also important to make sure your children understand the mechanical parts of money—compound interest, the stock market, debt and investing. This can be hard if you are not so sure yourself.

When my kids were 7 and 9, I tried really hard to find a few videos on YouTube using, “teach kids about investing” … here is the problem: everything was hard to understand, too long, boring, and/or featured someone who knows a lot about investing and wants to impress you with their geeky insights.

A 9- and 7-year-old didn’t care. They think you're boring.

So this is what I said to my kids:

“You guys are really good at saving money, which is important because you never know what might come up in the future that will require you have money. But if you don't invest your money, the cash in your savings accounts actually gets smaller in a way, because it loses its power to buy things. This is because every year, pretty much everything costs more. Milk, gas, toys and clothes get a little bit more expensive. So it is important to invest our money. Investing money is also a great way to make money because if you do it right, there is a very good chance that over a long time, your money will grow much, much faster than if you just park it in the bank, or your save jar.

There are lots of ways to invest. To start, we are going to invest in stocks.

A stock is piece of a company. The company issues stocks as a way to raise money. So, if our favorite bakery wanted to grow, and open a second bakery, they might issues stocks. You and I could buy a stock, which gives the bakery money to grow the company. We buy the stock because we believe that the bakery will be a success and grow and make money. And because we now own a small piece of the company — the stock — when the bakery makes more money, we make more money. That is investing.

Not every investment will go up all the time, and some of them will go way down to zero. That is why it is important to buy lots of different types of stocks in different industries and countries. If you do that properly, you have an excellent chance of making money if you hold on to your stocks for a very long time. It can be complicated, so let's start simple.

Today let's buy two stocks.

They stared at me blankly — more or less how they looked when they watched the stupid YouTube investing-for-kids videos.

Whatever, kids! I'm trying!

Next, I suggested they each use the $40 Christmas money they received from their Great-Grandma Shirley — my grandmother who did very well in her investments with my late grandfather by living a frugal lifestyle, buying Blue Chip stocks and holding on to them for decades and decades.

I skipped those details with my children and focused on the computer, which, as you know, is mesmerizing.

Thankfully, there are incredible online tools that make financial education really simple:

• FDIC’s Money Smart program gives you free tools to teach kids about money
• U.S. Mint for Kids has online games, videos and lessons about how money is made and works
• This playlist of Sesame Street personal finance episodes in various languages for different cultures and currencies 

Teaching financial literacy to students  in middle school — 5 money lessons

1. Use debit cards

Face it: Cash is decreasing in use, and there is no sense pretending otherwise. By middle school, your kids are old enough to learn to use credit responsibly.

Start with a pre-paid debit card. There are several on the market, including:

• Greenlight 
• Famzoo
• GoHenry

2. Shop in real life, IRL

So much of our shopping is done online, which can be great for finding bargains — as well as stuff we don’t need, or won't use.

Lead by example and curb your online browsing habit.

Try to shop in physical stores with your kids for clothes, household items, as well as browse for books, games and toys for friends’ and siblings’ birthdays.

The selection is smaller, and in-store shopping presents an opportunity to compare two items, side-by-side, including prices. 

3. Teach delayed gratification in children

When your kid expresses that she wants to buy something, adhere to the 24-hour rule: You have to think about it for a full day before you pull the trigger.

If a day later, the kid does not bring it up, then there is no purchase.

Also, during that day, take the opportunity to discuss the pros and cons of buying the toy — including what else that money could be used for.

4. Help your middle schooler set longer-term goals

Help your child identify larger purchases that require saving for: a bike or expensive toy, for example.

Cut out a picture of the item, and pin it to your kid’s wall or the kitchen bulletin board.

Write down how money from each week’s allowance needs to be saved by a certain deadline in order to have enough for the prize.

For longer-term goals, consider buying a CD, put savings in a money market account to help your child understand how compound interest can help them reach their goals faster.

5. Use your tween’s cell phone to teach investing lessons, too.

Whether their device is too slow, too old or has too little storage (my tween says her Android cannot hold more than 64 photos. Cry me a river, kid!), your child’s device may be a source of frustration — and vocal cries for an upgrade. This is a great opportunity to introduce money lessons:

Goals and budgets

While your kid’s wonky phone may inspire a goal of a new phone immediately, this is a great opportunity to help your child hit pause, create a thoughtful goal, and budget a financial roadmap to get there.

Compound interest

Perhaps your teen has enough money saved to buy a new phone now. If their savings are not in an interest-bearing account, use this moment to explain compound interest, and the cost of buying, vs. the cost of financing a new device.

Inflation and cost of living

Now is a good time to explain that because of inflation, a new phone in the future will likely be more expensive, and weave in the importance of investing money — even in a savings account — because a dollar today is not worth what a dollar will be able to buy in the future. This is also a good chance to explore the power advertising has on our desires and goals.

Interest (APR)

If your child is compelled to buy a phone in the moment, but does not have enough allowance money saved, you may look online for a phone purchase payment plan (or you might choose to act at the bank and loan her the money — with interest, of course), and use an online compound interest calculator to explain, in real sums, what the actual, out-of-pocket price will be.

Spend now vs. later

Help your child weigh the pros and cons of buying a new phone now, versus later when their current device is truly dead. Explain that while she may be irritated now, all phones’ capacity for speed and battery life always declines, so that pain point will not be remedied permanently. If she spends her allowance/work money/savings on a new phone now in a fit of frustration, her savings may be depleted, which will limit her buying options in the future.

Risk management

A phone device is also a chance to introduce the concept of lost opportunity cost, and risk management. Help your kid understand that savings spent on a new phone will no longer earn interest. Also, those funds will no longer be available for an emergency, much less a fun outing with their friends that may come up,or saving up for a car in the future. Help your kid balance immediate needs, short-term desire, and long-term goals — and understand how investing vehicles can help reach goals.

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Financial literacy for students in high school — 5 money lessons

1. Make giving a function of teen's time and energy

In your money lessons for teens, encourage your student to continue giving a portion of allowance, gifts and job earnings to charity.

But also make a requirement of volunteer time.

Express to your teen:

“Charity is about giving of yourself, which can include money, but is also about your time, energy and talents.”

2. Teach teens investment basics

Years ago, my daughter asked the associate at our local branch: “My account is getting less than 1% interest. What can you do for me?”

Compound interest is a concept many adults don’t understand, so spell it out with a simple online calculator.

Encourage your teen to seek out a higher-interest savings account if your local bank falls short.

Talk to your teens about your own investment strategy. Perhaps you don't have one yet, in which case, it's never too late. Here is my rundown of investing to build wealth.

3. Start talking about college costs early and often

The worst message about college a parent can give your student is: “Get into the best school you can, and we’ll figure out the money part.”

That is simply unrealistic for all but a very few affluent families.

Instead, start talking about the return on investment for education.

Some degrees and schools may correlate to higher-paying jobs, but others will not.

Make it clear how much the adults in your family can contribute financially, and return to that compound interest calculator to help your teen understand the burden that student loans will have on their future.

4. Teach the drawbacks and power of debt

In addition to education loans, college students are prone to start adulthood burdened with credit card debt.

Pull up your kid’s credit history (children are surprisingly often victims of identity theft!) and discuss different kinds of debt and ways to use credit wisely.

Be vulnerable, and share your own experience with debt — the good, bad and ugly.

Share if you have gotten in over your head, and how that impacted the family’s security, as well as your own feelings about it.

Perhaps you are struggling with debt. Here is a guide on how to get out of debt (even on a low income) and tax relief companies if you are dealing with tax debt.

5. Keep the message simple and positive

So many adults fail to take control of their personal finances because they feel overwhelmed.

Express to your child the fact that: “Money might seem complicated, but with a few simple habits, including regular saving, paying bills on the time, giving to others, and investing for the future, you will be able to set goals and work towards your dreams.”

Here’s an example of how I taught my daughter about money and entrepreneurship

I have been self-employed for nearly 20 years, and believe that humans are inherently entrepreneurial. After all, until the industrial revolution 150 years ago, the majority of people (as they are globally, today) were farmers and/or tradespeople who worked for themselves, and perhaps within a self-formed cooperative of some sort.

Here is a story of my daughter Helena, as a 6-year-old hustler:

Yesterday, Memorial Day, my kids and I joined some friends and my brother for a day of lounging in Central Park: playing catch, soccer, people watching, picnicking on cream-cheese-and-strawberry-jam sandwiches and otherwise enjoying the gorgeous late-spring day.

After an exasperated hunt for lady bugs, which had recently hatched throughout the city, Helena, 6, showed up with a delicate leaf-green winged insect captured in an empty water bottle. She decided to make some coin and proceeded to march blanket-to-blanket and sell her find. “Would you like to buy a bug? $3,” she said to surprised Upper East Side retirees and extended families speaking to each other in Spanish. When that proved fruitless, Helena didn't get frustrated or blame the customer. She switched up her product: a small, stuffed rooster she found in the grass.

“Would you like to buy my chicken?” she asked confused sunbathers who glanced over her shoulder, searching for the kids' parents/boss. The rejections didn't stop her. She kept going.

My brother Josh and I watched this show from afar, giggling at the prospective clients' confused looks and Helena's unwavering pluck. After a few unsuccessful sale she'd stride back to our blanket and Josh and I would coach her on sales tactics: “Try: ‘OK, if you can't pay $3, how about $2?'” or, ‘My normal price is $3, but because I like you so much I'll give it to you for $2,'” and she'd confidently head out to try again.

We noticed she was avoiding a big group of a dozen bright-eyed 20-somethings laughing and drinking beer. But I sensed this was Helena's golden goose and encouraged her to make a move.

She hovered on the edge of the party for a few moments, just far enough away for them to take immediate notice. She was for the first time that afternoon shy. When she hesitated and looked back at me, I gave her a big smile and thumbs up and a visual urge to carry on. And so she took a confident step forward and said, through the laughs, “Would you like to buy my chicken?”

“What's so special about your chicken?” called one woman.

“It makes a noise,” said Helena, giving the bird a squeeze. squeak-squeak

“What's your name?”

“Helena,” Helena said.

“How much?” called on straw-fedora sporting guy who was sitting next to a pretty blonde he'd been chatting up all afternoon.

“$3,” Helena said.

And from across the lawn we saw a hand shoot up waiving three $1 bills. A roar of congratulations rose from the group. The customer insisted Helena pose for an iPhone pic with him, holding the merch.

And Helena strode back to her family, a fan of dough in her hand, a smile stretched from ear-to-ear.

The rest of the afternoon was a giddy brainstorm of other ways she could make money. We landed on the ubiquitous lemonade stand, and we talked margins and location and net profit. She decided that homemade drink would be more delicious but also more expensive and labor-intensive. The powdered version tastes worst. But artificial drink with a fresh lemon slice would be a good compromise. Even her brother Lucas, 4, got in on the excitement, and  suggested: “I know! I will pour the lemonade and you can hand it out to the pee-pole!”

As a parent I was relived that all these business and money lessons that I aim to teach my kid taught themselves — organically. But as a business person I was inspired.

Here was this kid who figured out the most basic business lessons with out any hangups. She did not take rejection personally. When she failed, she tried again. When one product didn't move, she tried another. When a sales pitch bombed, she switched it up. When she got stuck, she accepted suggestions. And, most of all, Helena had fun.

Bottom line: Financial literacy for kids starts at home

If adding personal finance lessons to your schedule sounds like another chore that won't get done, keep it simple: Focus on your own good habits and organically model good money behavior through everyday interactions, giving voice to your values, how you make decisions at the store, at home and in your career and business.