Dollars and sense: Teaching financial literacy early pays off

Discover money lessons that set children up for success.

In no uncertain terms, youth who participate in early financial literacy programs make better financial decisions later in life. Based on 76 empirical studies across 33 countries, the Financial Industry Regulatory Authority (FINRA) and National Endowment for Financial Education (NEFE) established that financial education programs have significant positive impact on both financial knowledge and financial behaviors.

Yet, as of last year, only 23 states require financial literacy education for high school graduation.

There’s a gap that needs to be filled – and one that parents and grandparents are well-equipped to bridge.

Proof is in the piggy bank

Arguably, money management skills are just as important for a child to gain as healthy eating habits and good manners. Financial literacy fosters positive behaviors that last a lifetime.

Research shows people with higher levels of financial literacy are more likely to spend less of their income, establish an emergency fund and open a retirement account than those with lower levels of financial knowledge. Those required to take personal finance classes make better college funding choices, have better credit scores and a higher net worth on average.

There are also surprising benefits of learning money management early on. According to research recently published in the Journal of Family Issues, those who indicated learning financial literacy from parents during their youth tended to enjoy more flourishing romantic relationships into adulthood. Healthy financial habits lead to less stress about money, putting less pressure on relationships.

Depending on your child’s age, financial literacy involves learning concepts like needs vs. wants, budgeting, saving, earning money, giving back and even investing. While it may be tempting to jump right into the financial topics that are top of mind for you, remember that this process is about building strong foundations for your child’s financial future and instilling confidence in their own financial independence. A lecture about the difference between an IRA and Roth IRA can come later.

Even if your child is learning about financial management in school, studies show that parents are the most influential source of financial learning. Overt financial teaching that extends into emerging adulthood drives financial literacy.

When (and how) to start

Experts say it’s never too early to start talking about finances as long as the conversations are age appropriate. Simple lessons woven into everyday life can be made fun with a little effort.

To identify essential money lessons that are suitable for your child, seek natural opportunities to introduce financial knowledge. For instance:

• Five-year-olds: Discuss the difference between needs and wants while shopping at the grocery store.
• Eight-year-olds: Ask your child to figure out the right combination of dollars and coins to pay for the shirt you’re purchasing.
• Eleven-year-olds: Reinforce the importance of saving money and delayed gratification, especially as they desire more expensive items like a smartphone or video game system.
• Thirteen-year-olds: Explore their job interests, research requisite schooling and skills, and compare salaries.
• Sixteen-year-olds: Talk about their preferred brands and have them consider which stocks have growth potential.

Don’t be afraid to be transparent about the household financial activities and involve your children. These everyday decisions serve as real-time and relevant lessons in finance. Start with small, tangible tasks. For instance, if you’re taking a family road trip, you could ask for help allocating the snack budget at each stop.

Allowance remains a much-debated topic when it comes to financial learning. While some studies show allowances instill responsibility, others believe they lead to entitlement and decrease intrinsic motivation. If allowance is tied to chores or jobs, this can teach children the relationship between work and reward. It also empowers children to make independent choices when spending their hard-earned money. Apps like BusyKid and Greenlight let you assign dollar amounts to specific tasks and manage allowances together.

Pro tip: As your child or grandchild gets older, consider upgrading their piggy bank. There’s a real, working ATM from Lakeshore Learning that allows kids to create a savings goal and keep track of their balance.

Gamification of money topics

Though finance is a serious subject, lessons don’t need to be all too serious. When introducing money talk, think about how best to keep your children or grandchildren engaged in the topic.

Gamification not only makes learning fun but also makes lessons stick – because you’re practicing the skills you’ve learned, some might say, by “hiding” them in play. Beyond fun, gamifying learning offers several benefits: Setting clear goals in the game creates a growth mindset, and enjoying the object of the game fosters intrinsic motivation. Playing these games together also makes money an acceptable social topic, which lays the foundation for discussions about finances into adulthood.

The classic money games, like Monopoly and The Game of Life, are still great teachers but there are so many more resources out there now for kids to immerse themselves in these lessons. The US Mint website offers a variety of fun digital games for kindergartners through sixth graders. The Stock Market Game, which is geared for an older cohort, simulates the stock market and gives participants a virtual $100,000 portfolio to manage. Mycreditunion.gov offers digital resources, like Hit the Road, a financial adventure game in which the player determines how to spend their money during a cross-country trip.

If family game night is more your style, Money Bags is an exciting game that teaches basic money skills using fake currency. Players collect, count and exchange money on the game board. Exact Change is reminiscent of Uno, but with cards that have currency values. The game encourages players to be creative about making exact change. And The Allowance Game explores the concepts of earning money for completed chores and choosing what to spend it on.

Reinforcing concepts

No matter how you choose to teach your child or grandchild about finances, make it a goal to keep them engaged in learning and willing to discuss money with you. As adults, we’ve all had our share of lessons and mistakes, and this is an opportunity for your child to practice before the stakes are higher.

Encourage your children to get involved with school programs that offer opportunities to learn about money topics, like Junior Achievement BizTown. Consider financial literacy books for kids. For children aged 3 to 7, the classic Berenstain Bears series offers a few titles about money, including “Dollars and Sense” and “Trouble with Money.” As they grow older, middle schoolers can explore more advanced reads like “How to Turn $100 into $1,000,000,” which provides both inspiration and practical advice on earning money from a job or starting a business.

Initiating money conversations early on is a crucial step in shaping children’s financial understanding and responsibility. Encourage transparent discussions about money and support age-appropriate learning to foster confident, financially responsible adults.

Sources: finrafoundation. org; endseclusion.org; news. byu.edu; files.eric.ed.gov; blog. brainpop.com; mycreditunion.gov; parents.com; freedomsprout.com; financialeducatorscouncil.org; nces. ed.gov; brightchamps.com