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6 Lessons for Teaching Financial Literacy to Your Child

All parents want a happy future for their children, yet not enough moms and dads teach their kids about financial literacy, a key component of happiness. Educate your kids about money management and it can change their lives for the better.

Teaching Financial Literacy to Your Child

All parents want a happy future for their children, yet not enough moms and dads teach their kids about financial literacy, a key component of happiness. Educate your kids about money management and it can change their lives for the better.

Start with simple money lessons in elementary school and up the ante with teenagers, because in just a few years they’ll be off to college or moving out. Here are six lessons that will help prepare them to be independent and self-sufficient when that time comes.  

Teaching Financial Literacy to Your Child: Encourage Earning

Help your kids understand that money doesn’t grow on trees by encouraging them to earn their own cash, rather than relying on you for everything. 

For younger children, set up an allowance in exchange for household chores. Investopedia says this helps them learn “the value of their hard work.” As kids grow, suggest that they explore neighborhood jobs, such as lawn mowing, dog walking or babysitting.

Once old enough, talk to your teen about the advantages of a part-time job:

  • Making more of their own money
  • Learning a practical job and people skills
  • Building a college or job resume

Teaching Financial Literacy to Your Child: Create Budgets

Starting with their allowance and continuing with side gigs and part-time jobs, show your teen how to create and manage a budget. Using a spreadsheet, get them to enter any cash earned along with any cash outlays, explaining that they can’t spend more than they earn.

CNN Money recommends making teens “responsible for funding part of their lifestyle to help teach the value of money.” Entertainment is a good spending category for this. If they want to go out with friends, it’s on their dime.

This is also a good way to teach them about wants versus needs and delayed gratification. For example, if they want the latest video game that costs $50, they might have to mow the neighbor’s lawn quite a few times before they can afford it.  

Teaching Financial Literacy to Your Child: Open a Bank Account

Financial institutions play a major role in our lives. Help your kids understand this and help them get used to interacting with banks by opening a checking or savings account for them once they’re earning their own money. Until they are of legal age (typically 18), your child’s bank account has to be in both of your names. If the joint account is a checking account, you can tie a debit card to it, which can be a practical tool in teaching them how to manage their money. High school is a good time to consider getting your teen a debit card.

Help them get in the habit of reviewing their monthly statement, and teach them how online and mobile banking work.

Teaching Financial Literacy to Your Child: Promote Savings

A recent survey indicates that 58% of Americans have less than $1,000 in savings. Help your teen avoid this fate by teaching them to save some portion of every paycheck. A good rule of thumb is the 50-30-20 rule:

  • 50% of pay goes to essentials
  • 30% to discretionary spending
  • 20% to savings

A key reason to promote savings, as noted by Parent Toolkit, is that it “allows them to have money, even when they don’t need it, as opposed to needing it and not having it.”

Teaching Financial Literacy to Your Child: Explain Credit

Plastic is not free cash. Teach your teen that lesson and they will thank you later. Explain the following:

  • Credit is borrowing that comes with a cost.
  • You typically start building your credit score with your first credit card, so explain to your child why it’s so important to be responsible.
  • Your credit score is a key factor in determining whether you can get a loan or credit card and what interest rate you’ll pay.
  • A higher credit score is better (720–850 is considered excellent).
  • Tips for increasing your credit score: Use only about 30 percent of your available credit, pay your bills on time, and pay your full credit card balance each month.

Before your teenager goes to college, help them get a credit card. Such accounts co-signed by parents have small credit limits, helping teens safely learn how to manage credit and begin building a credit history.

Teaching Financial Literacy to Your Child: Discuss the Future

The ultimate goal of financial well-being is building a more secure future, and that involves planning. Teach this lesson by talking to your teen about college affordability long before they apply to schools. If they’ll need student loans, encourage them to factor that into the decision about which school they’ll attend. Get them to research the future earning potential for their desired major and weigh it against the cost of tuition and possible student loan repayment obligations.

Bottom line, parents who teach their kids about financial literacy are setting them up for a happier and more secure future.     

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