Though teenagers may be successfully juggling AP classes, extracurricular activities, and standardized tests, they are failing at a vital subject necessary for life: financial literacy.
A study released by the Program for International Student Assessment in May found that 1 in 5 teenagers in the U.S. lacks basic financial literacy skills, which is approximately 22 percent of the country’s teenage population. PISA surveyed 15-year-olds from 15 countries to test how well they understand financial concepts, products, and risks, and the U.S. ranked seventh overall, while China secured first place, followed by Belgium and Canada.
Unfortunately, financial literacy skills are often not taught at school, so it is up to parents to equip their children with the knowledge and tools to be able to manage their money wisely. These conversations should not just take place during high school either. Experts say financial literacy skills should be instilled from a young age—even as young as 3. Here, financial experts share their strategies for teaching kids money skills for life.
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Tips for Kids Ages 3-6
Learn your 1, 2, 3s. Your child may learn how to count by the time she is 3 years old and start to grasp the idea that you need money to pay for items while shopping. Jean Chatzky, financial editor of NBC’s Today Show, says she had discussions about money with her kids when they were young. For example, she explained that one particular brand of orange juice was cheaper than another, so that’s why she bought it. “It’s just a running dialogue where you talk about money,” Chatzky says.
In learning that you need money to buy goods, this might also be the age your child understands how to count coins and dollars and may even begin to receive an allowance for doing chores.
Tips for Kids in Elementary School
Give cash rewards for chores. When your child reaches elementary school, he may begin to take on more chores, such as folding laundry and putting it away or feeding a pet, and receive an allowance in cash to be able to see money as a tangible asset. This is a fundamental way to teach him how to earn and save money, and he will be able to physically see and count his cash. Chatzky recommends having two different jars: one for saving and one for spending money. (Some experts recommend adding a third jar, for money to be given to charity.) “So much of our money these days is invisible with Venmo and direct deposit,” Chatzky says. “It’s important that kids actually see and use money before transitioning into electronic spending.”
Differentiate between credit and debit cards. Though it may seem kids are too young to learn this, it is an opportune time to teach them the difference between credit and debit cards. Gregg Murset is the founder of BusyKid.com—an app to keep track of your child’s chores and allowance—and a certified financial planner based in Arizona. He says parents can create a teachable moment while waiting in line at a grocery store to compare the two types of cards. “That’s an easy way to teach them, and your cards are right there in your wallet,” Murset says.
Open a savings account for your child, and have her go with you to learn how to deposit money into the account. Roy Paul, executive director of Cents Ability—a New York City-based nonprofit dedicated to teaching students from low-income families financial literacy—expressed the importance of teaching kids how to save allowance. “It really helps them understand how to take that money and put it into an institution that will protect it,” Paul says. “That’s also a good time to explain how interest works, and that when you put this money into an account, it will grow over a period of time.”
Tips for Kids in Middle School
Get them involved. Middle school is the time when your child can learn about the value of real world items, such as the property value of your house and how much bills cost. This is also the age when he might receive his first debit card and learn how to deposit and withdraw money.
Discuss needs vs. wants. Have a conversation about discerning the difference between needs versus wants. Do you absolutely need a new pair of shoes or do you just want it? Asking questions like this establishes a foundation to be able to analyze whether spending hard-earned money on an item (especially material) is truly worth it.
Talk about saving for college. If your child wants to go to college, it is important for her to understand how expensive tuition will be and that saving for it should start now. “A lot of kids, poor and wealthy, do not really have an understanding of how you pay for college, from the savings that happens on the parents’ ends to taking out loans and borrowing money,” Paul says. This is also a good opportunity to talk to your child about loans—that they’re not free money and they have to be paid back with an interest rate.
Tips for Kids in High School
Have them start “adulting.” High school students will soon enough become full-fledged adults and should begin taking on more responsibilities. Many high school-aged kids may get their licenses, so this can be an opportunity to send them out to run errands at the grocery store, or even have them pay for gas or oil changes to get the experience of making everyday transactions independently.
Think about the big picture. Paul shared that Cents Ability teaches kids a 50-30-20 rule to manage their money. From each paycheck, 50 percent of it should go to absolute needs such as bills, rent, car insurance, etc.; 30 percent can go to miscellaneous items such as a vacation or clothes; and 20 percent should be saved in a bank account.
Make an investment. Stocks are an equity investment, and when you invest in one, there is a chance that it will yield a higher return over time. Murset advises teens buy stocks as a first step in learning how to invest money, even if it is just $20. “The best learning is done by doing,” Murset says, “Just jump in and buy some [stocks] and start watching them grow.”
Speak with a professional together. It’s okay to ask for help when you do not know the answer to your child’s question. Paul recalls a time when his mother set up an appointment for the two of them to speak with her tax accountant to learn about interest rates for college. “If parents do not know the answers to these questions, they should not feel embarrassed about it,” Paul says. “If you have someone who does your taxes every year, ask them to take a few extra minutes to explain these concepts to your kids. Most of them are happy to do it.”
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