Financial Literacy 101 – Teaching Your Student Financial Literacy
Preparing your student for adult life is part of your job. And financial literacy is a critical element of this. Many children don’t learn financial literacy, and only four in seven American adults are classified as “financially literate.”
This means that a lot of parents can’t teach their kids because they don’t know enough themselves. It’s something, though, that should be on your curriculum. Read on to find out how you can help your kids learn financial literacy.
Introduction to Financial Literacy
Financial literacy is defined as the ability to understand and use financial skills. This helps you develop a smart relationship with money that can keep you out of trouble; people lose thousands of dollars a year to poor financial literacy.
Financial literacy also reduces your vulnerability to fraud, supports greater life goals, and helps with retirement planning. It also helps your child responsibly use credit cards when the time comes. You can even start with basic concepts with young kids, but in this blog, we’re focusing on skills for 12 to 18-year-olds.
The key financial concepts your child needs to learn are:
- Earning. Knowing how much money is coming in, alternative ways to make money, etc.
- Saving. Learning to set aside money for later and improving tolerance for delayed gratification.
- Spending. Controlling and tracking spending, working out what spending is essential.
- Investing. Putting money into investment accounts and knowing when to seek help.
- Borrowing. Managing debt and keeping it under control, avoiding unsecured consumer debt such as credit cards.
Basic Financial Skills (Ages 12-14)
Your tween and early teen should already have a basic understanding of what money is, but this is a good age to start having them handle their own transactions. Involve your child in family budget conversations and don’t avoid talking about money in front of them. There are three areas to work on at this point:
Understanding Money and Transactions
Make sure that your child knows the value of money by talking about what things cost. Talk about credit (money coming in) and debit (money going out). You can also talk to your child about banks.
At this age, children can’t legally open a bank account but you can open a bank account with them. This is a perfect age to give them their own savings account and help them save part of their allowance. They will learn how to use an ATM, when to go to the bank, and start to understand online banking.
Their savings account should be a joint custodial account in their name and yours, with a plan to transfer it to their name when they turn 18. This situation gives your child their own money to use and manage.
Budgeting Basics
Show your child the family budget so they see how to track income and expenses. Then have them try it themselves and create a simple budget using their allowance, encouraging at least 10 to 15% to go into savings. If they have something big they want, get them to save up for it themselves.
A simple budget is just money in, money out, but it will help them realize that all spending should be tracked.
Smart Spending
An important concept at this stage is needs vs. wants. Children (and many adults) often confuse the two. This doesn’t mean that you should be teaching kids to subsist only on basic needs, mental health and a good quality-of-life are also needs. However, kids need to realize that the latest PlayStation game is less important than a new winter coat!
Take kids grocery shopping, teach them to compare prices, look for deals, and understand value. The knock-off brand cereal might be cheaper, but if they strongly prefer a national brand, it’s worth paying the extra. A lot of people confuse “value” with “cheapest.”
BlueSky’s personal finance course surveys smart-spending fundamentals like budgeting, saving, checking, investments, credit, the wise use of insurance, and taxes. Get a detailed description with the class syllabus!
Intermediate Financial Skills (Ages 15-16)
At this age, your kid is looking for their first job, probably working a few hours a week and bringing in their own money. You can start teaching them how to make the best use of it.
Advanced Budgeting and Savings
At this point, your kid will be ready to set proper financial goals. You might already have started on this by asking them to save their allowance for something they want, but kids at this age start to have big goals and may even be starting to think about their first car. Encourage them to keep putting money in savings, but begin talking to them about interest rates and what they mean.
You can start introducing the concept that while savings accounts are good, they aren’t necessarily the best. Also, talk to them about your emergency fund and encourage them to build one themselves.
Introduction to Investing
From interest rates you can segue into investing and how compounding interest works. Kids at this age should start to learn about stocks, bonds, and mutual funds. While they can’t invest on their own yet, you can help them with it, perhaps by putting a bit of money into a CD or money market account. Keep an eye on them if you do let them buy stocks it can be addictive to some people.
Credit Basics
Your kid won’t have a credit score yet – but you can use yours to teach them how one works. If you are comfortable doing so, you can add your child as an authorized user to your credit card. When you do give them a card, make sure they are ready for it. They should have an understanding of budgeting and be able to delay gratification, and know that the card should be paid off right away.
Teach them about debt and how dangerous it can be. Use illustrative examples of how people can become buried under debt, such as a fictional character who spends too much on credit cards and then can’t afford anything they enjoy.
Advanced Financial Skills (Ages 17-18)
Your child is starting to spread their wings and may well be heading off to college, trade school, or a full-time job. It’s time to teach them some more advanced skills that can help them move out on their own.
Advanced Investing
It’s never too early to think about retirement savings. Teenagers can open a Roth IRA and start setting aside money now. This can be hard to convince them to do because the average teenager thinks they will never be old.
Talk to them about diversification and risk management. Consider, if you can afford it, booking them a session with a financial expert who can give them the financial literacy education they need.
Understanding Taxes
Taxes in the U.S. are complex. Even a simple tax return can ben confusing and a lot of work. Have them help you with your taxes and help them with theirs. Make sure they know how income tax works and the consequences of not filing on time. It’s a good idea to show them the value of using tax software, like TurboTax or H&R Block, to save time and avoid mistakes.
Preparing for Major Financial Decisions
First of all, college. Financial literacy for kids includes getting financial aid and making smart higher education decisions. For some kids this might be doing the first year at community college and then transferring. It might mean going in-state, if you can.
This is also the age when most kids buy a car. Sit down with them and show them how much your car costs to run so they understand it’s not just the purchase price. The cheap junker they think they can afford may actually be more expensive when you take repairs and maintenance into account.
Housing is also a conversation to have. Renting may be cheaper in the short term (and certainly while in college), but buying builds equity and helps keep costs from ballooning. It’s not a no-brainer for anyone, child or adult.
Practical Financial Activities
Showing is always more important than telling. Here are some activities your child can engage in that will help them develop financial literacy at a practical level.
Real-Life Financial Exercises
Some of these have already been mentioned, but:
- Have them open and manage their own bank account. You can transfer it to their name when they turn 18. They will learn how to use banking systems and manage savings.
- Setting a personal budget. You can do this as young as 12 when they get an allowance.
- Simulated stock market investing. There are virtual stock market simulator games out there that kids can play, often at no cost.
All three of these will help your kids practice and learn skills with little risk. You’re there to step in, but if they screw up their budget and run out of money, that is a lesson learned!
Encouraging Entrepreneurship
Not everyone is cut out to be an entrepreneur, but having your kids try it will help them determine that and get a head start if they are. Have them start their own small business, which might be the traditional lemonade stand or something else, depending on their interests. If you’re parent to an aspiring entrepreneur and find them wanting to know more, BlueSky’s entrepreneurship class is a great place begin. This course introduces concepts like marketing, acquiring financing, managing, and the legal requirements of owning and operating a small business. The social media marketing course is another great resource for kids to learn how to grow a business in the digital realm (see the course syllabus for more information).
Entrepreneurship can help set a child up for a highly successful future.
Resources and Tools for Financial Education
Books and Online Resources
There are a number of books on money and finance for teens.
How to Money: Your Ultimate Visual Guide to the Basics of Finance is one of the most popular. It’s a little intimidating for some younger teens, but it’s also a useful reference…for parents too.
Some other suggestions are I Want More Pizza, which is very inviting for kids who don’t like to read.
MoneySKILL is a free online personal finance course for teenagers.
Financial Literacy Apps and Games
Your kid might be more responsive to a mobile app that teaches them financial literacy. If your kid likes football, have them try Financial Football, which teaches kids about finances through a football metaphor. Another really fun game is Shady Sam, which teaches about loan sharks and bad debt.
Tech-savvy kids often respond well to a budgeting apps.
BlueSky Courses for Financial Literacy
If you’re a parent who would like to begin teaching your child about financial literacy but feel overwhelmed by the broadness of the topic, don’t worry, BlueSky has your back. From accounting and personal finance, to entrepreneurship and life sills, BlueSky offers a variety of courses that can teach your student about their finances and other skills for living on their own.
Explore these career and finance-oriented courses and know that BlueSky’s teachers are always there to help. They are part of your team to so that preparing your child for financial success doesn’t all fall on you.
Get more information about BlueSky and the enrollment process here.
Preparing for the Financial World
Overall, many American adults lack financial literacy, and it is not always taught in school. It’s your job to make sure that your child is ready for the financial world. Your child (and you) should always be learning and practicing financial skills. Involve them in your budget decisions and make sure they feel comfortable talking to you about money.
