TL;DR
- It is important to develop financial literacy in kids. By exposing kids to money management early, they can learn the value of money and saving. They may also make small mistakes early on and so avoid bigger mistakes later.
- As a child, I benefitted from learning to think about my purchases before I made them.
- Other expert-informed strategies, include:
- Give kids an allowance. You may or may not tie that allowance to chores or homework.
- Encourage (or impose) saving. You could also open a savings account for your kids.
- Help kids develop long-term savings goals.
- Give kids opportunities to plan family experiences/vacations. Give them a budget and let them plan activities or restaurants they’d like to try.
- Involve kids in low-stress family money discussions.
- Teach kids about compounding. You may also open a custodial brokerage account or 529 to help them see how investing works.
- Use fun money resources like books, podcasts, and shows to teach kids about money.
- Want more resources? Check out my free budgeting worksheets for kids!
Before I dive into this topic, let me be upfront. I do not have kids. However, I hope to have kids one day. And as someone who is very interested in personal finance, I would love to build financial literacy in my future children. I also know that trying to teach your kids about money and having them actually care are two totally different things. So when I see a podcast or an article on financial literacy for kids, I perk up. I love learning about strategies that have worked for others so that I’m ready when the time *hopefully* comes.
My Own Childhood Lessons in Financial Literacy
As a kid, I was pretty good with money. I got a $2/week allowance and quickly realized that if I wanted something good, I better save up for it for a long time. When I was about 8-years-old, I had a pivotal savings experience. I wanted a doll that cost $20 at Toys R Us. According to the box, the doll slept and woke up like a real baby. I was sold! After 11 weeks of saving, I could finally afford the doll (plus tax).
Like most children with no experience caring for real babies, I was so excited to have a doll that acted like an actual baby. However, when I ripped open the packaging and undid all the twist ties, I was extremely disappointed. The doll was made of hard plastic and it would go to sleep and wake up when you pressed a button on its back. So… not at all like a real baby. Though I’m guessing every parent wishes their baby would sleep if you pressed a button.
And so I experienced my first case of buyer’s remorse. Luckily, it didn’t deter me from saving. Instead, I felt proud for having saved for so long. Plus, it made me more cautious about the things I bought. After that, I became better at only buying things if I really wanted to spend my hard-earned money. Or relatively easily earned from making my bed every morning and being generally an angelic child.
My Dad reinforced this lesson by having us think for awhile about our purchases before we made them.
Strategies for Cultivating Financial Literacy in Kids
Give Kids An Allowance
My experience and the advice of many experts suggests that giving kids an allowance is one of the best ways to teach them about money. Simply buying things for kids whenever they want something can be a lost opportunity because kids don’t have as much of a chance to learn the value of money or the things they buy.
How much should you pay for allowance? Some parenting experts suggest $0.50 for every year of age. Others say $1-$2 for every year of age. The right amount depends on your family’s financial situation and what feels right for your kids.
Chores or No Chores?
Finance and parenting experts are divided on whether to require kids to do chores for their allowance. On the one hand, tying chores to an allowance can cultivate a good work ethic. On the other hand, doing so may feel disciplinary and/or detract from the spirit of community if kids expect to only pitch in for a reward.
If you are deciding whether to tie allowances to chores, I’ve heard of a couple of creative options for doing so (or not):
- Assign prices to different chores. Kids can do as many or as few as they want, depending on how much they want to earn. You might give them a base set of chores, like making their bed or setting the table, that are not tied to the allowance.
- Kids bid on chores. This one is potentially contentious, but kind of fun if you have multiple kids. Let’s say you need the house dusted (the worst chore). Your kids can then bid on the chore if they want to do it. Your oldest says they’ll do it for $30, their sibling says they’ll do it for $25, and it goes back and forth until they settle on the oldest doing it for $20.
- Do not require chores, but have an allowance be contingent on kids learning about finances with you. This might involve attending weekly family money meetings, it could involve them sitting down with you to hear about the things you’ve learned about personal finance, or even listening to an age-appropriate podcast together or reading an age-appropriate book.
More traditional methods like giving an allowance for a set list of chores or for doing all their homework on time can be great too.
Discuss (and Potentially Enforce) the Value of Savings
Some financial experts recommend requiring kids to save their allowance or put it in buckets. For example, you might require your kids to save 20% and donate 20% of their allowance. This is a great option for getting kids in the habit of saving if they wouldn’t otherwise do it themselves.
That being said, I always get pretty nervous that these kinds of hard and fast rules will backfire as soon as kids go to college and have the freedom to make any and all mistakes. Keeping in mind I am not a financial advisor, I plan to teach my kids about the value of saving and get them excited about savings goals, rather than imposing a particular savings amount. They can then make their own mistakes and discoveries as they aim for those goals.
Starting a savings account for kids can be another great way of introducing kids to saving and banking.
Provide Kids with Opportunities to Plan and Dream with Money
Which brings me to the third recommendation: giving kids the opportunity to plan and dream with money.
On the material end of things, this might involve researching something they really want—like an art set for younger kids or a telescope or computer for older kids. As part of their research, they can then figure out how much they need to save. The next step is timelining out how long it will take them to save for that thing if they save, perhaps, 30% of their allowance each week.
An even more fun option is to get kids planning family experiences. If you’re trying this out for the first time, you might have your child plan a day out for the family. They get a budget for the day and figure out what you’ll all do for that amount or less.
With more experience, you might have your kids help plan vacations. Together, you can go over the budget for the vacation, discuss destinations, and look at flights. You might then give them opportunities to research activities and/or restaurants that fit into the budget. You could also encourage them to plan how much they’ll want to spend on souvenirs and save for that in advance.
Ideally, this strategy helps get kids excited about saving. It can also be very eye-opening for kids to see the prices of things and to try to plan fun activities with limited resources. Plus, kids may start to notice that they appreciate the experiences they save for more than material items.
Involve Kids in Money Discussions
This one might seem scary. We tend to be uncomfortable talking about our finances with our partners, let alone our kids. However, it’s good for everyone to get in the practice of communicating about money.
Of course, you don’t want kids to get frightened about your finances. Given that, it’s valuable to keep the tone of money discussions positive and constructive and avoid having any dire money discussions around kids.
However, it can be informative to show kids the cost of utilities, housing, food, and other regular expenses. You can then show them how much of your income is left after your fixed, monthly expenses are taken out and how you budget for things like presents, eating out, and other fun things.
You could gamify these discussions by getting the family to see if they can lower the utility bills compared to the previous month. Former financial advisor Joe Saul-Sehy and his family had great success with this. His kids became even more adamant about turning out the lights than he ever was and they lowered their electricity bill by a substantial amount. Alternatively, you might try to come up with a great dinner together that costs less than $15 to make for the whole family.
The point isn’t to turn kids into penny pinchers and, indeed, you ideally want to avoid that. However, combining this strategy with getting kids to dream about money goals is powerful for teaching kids to be more mindful of money and to strategically save more of it for what they really want.
Teach Kids About Investing and Compounding
I wish I better understood compounding as a teenager. As a kid, my ski instructor good-naturedly tried to teach me about compounding by saying if I started with a penny and doubled it every day, I’d have $5,368,709.12 after 30 days. While it was well meaning, I remember thinking, that’s not helpful because I don’t have any duplicating money.
A better option is to use a realistic example. Financial author Michael Gilmore (the Seven Dollar Millionaire) had a transformative conversation with his 15-year-old daughter. She asked how much she would need to invest each day to earn $1,000,000 by the time she was 65. Doing the math, they realized she would only need to invest $7 a day. This realization changed how his daughter thought about money and made saving and investing feel very worthwhile.
Once you discuss how compounding works, you might give your kids opportunities to invest. This guide from Nerdwallet is the best I’ve found for going over investing options for kids. The key points are that you can open a custodial brokerage account for your kids and eventually transfer ownership to them when they are of age. To get them excited, you might have them buy fractional (partial) shares of a company or two they love and invest the rest of the money in index funds.
Alternatively, you might start a 529 to save for kids’ education (ideally when they’re quite young) and show how those investments have grown over time.
Introduce Kids to Money Topics Through Books, Podcasts, Blogs, etc.
Finally, introducing kids to great resources about money, whether through books, podcast, blogs, or even TV shows (like Ramit Sethi’s new show How to Be Rich) can be a great option for getting kids informed and interested. If your kids are teenagers and won’t listen to you again until they’re about 25, this could be a good alternative to one-on-one money discussions.
Forbes has a nice list for younger readers. Older readers might enjoy this list of books from Investopedia.
If podcasts are more their speed, I recommend Stacking Benjamins, Afford Anything, and Nerdwallet’s Smart Money podcast for older listeners. Unfortunately, financial podcasts for younger kids are thin on the ground.
Summary of Financial Literacy Lessons
To sum up, there are a number of fun strategies for developing financial literacy in kids. These strategies include: giving an allowance, encouraging (or enforcing) saving, getting kids involved in planning and budgeting for family experiences, developing longer-term savings goals for kids, teaching them about compounding, providing an easy entry into investing, involving kids in family money discussions, and giving kids fun resources about money.
The choice of which strategies to pursue and how will depend on you and your children.
For related content, check out my posts on getting started investing, the Millennial’s guide to investing for retirement, money moves to prepare for a recession, and my budgeting guide.
If you liked this post, please consider liking, subscribing, or sharing, it’s always greatly appreciated! And remember, I am not a financial advisor, these recommendations are based on my own research. Before making any money moves, speak to a professional.
