Parents teach their kids many life skills, from tying shoelaces to riding a bike to brushing their teeth. But another essential life skill parents should teach their kids is financial literacy—and lessons should start at a young age.
Research reveals that our money habits have developed by age 7.1 And, for better or worse, these money habits can carry into adulthood.
Plus, there's a lot to lose if financial literacy is not instilled at a young age. In 2022, a lack of financial literacy cost American adults about $1,819 each.2 That translates to a total loss of more than $436 billion.2 As you can see, learning about finance is a skill that pays, quite literally.
Talking to your kids about financial literacy may sound intimidating, but it doesn't have to be. It starts with money basics: earning, spending, saving and borrowing money. Here are some tips and tools that can help set your kids up for financial success—now, and in the future.
Lesson #1: Earn Money
Many of us first earned money by receiving an allowance. Whether you decide to tie your child's allowance to chores is up to you. Chores help teach responsibility and valuable life skills, and an allowance can introduce kids to the idea of working for an income.
Another rite of passage is getting a part-time job as a teen. Earning their own money will feel great—and they'll learn that when you earn money, you don't necessarily keep all of it. This is an ideal time to talk to kids about tax requirements, the difference between gross and net pay and how to negotiate their salary or hourly rate.
Lesson #2: Spend Mindfully
A key component of financial literacy for kids is spending cash responsibly. Having their own money is one way kids and teens can practice making their own spending decisions. Even when kids are young, parents can explain the difference between needs vs. wants. Having kids reflect on whether something is a need or a want can help them spend mindfully.
Between advertising, social media influencers and the way the teen brain develops,3 it's not surprising that teens are vulnerable to impulse spending. Curb impulse spending by encouraging kids to have a 24-hour cooling-off period before buying an item, or get them to calculate how many hours they'd have to work to afford that item. If they earn $10 an hour, are those $200 designer sneakers really worth 20 hours of their time, or is there a cheaper alternative available? Label-obsessed teens could try thrifting or visiting the library to borrow the latest video game or novel.
Mindful spending doesn't mean kids should deprive themselves of fun purchases. Give them the freedom to make spending choices now, while the stakes are relatively low.
Lesson #3: Create a Budget
Learning how to create a simple budget now can help set your kids up for success later in life. After all, budgeting is fundamental to managing your money and reaching long-term goals. Introduce younger kids to the concept of budgeting using a simple jar system: one jar for spending, one jar for saving and one jar for giving.
As kids get older, you can introduce the concept of household budgeting in the real world. You may choose to share your own family budget so your children learn what it takes to run a household and the difference between fixed and variable expenses.
If your kid learns more by doing, check out Claim Your Future®, a free budgeting game for middle and high school students. This online game assigns kids with a random career, and they have to decide how they'll spend their money between housing, food, transportation and other expenses.
Tech-obsessed teens are at an age where they can put budgeting theory into practice. If they're earning their own money, they can try a budgeting app like YNAB (You Need A Budget). YNAB also has tutorials to help your teens up their budgeting game. Mint is another great personal finance app to help teens set a budget and track their spending. And it's free! If your teen isn't already aware of the cash-stuffing trend on TikTok,4 using cash to pay for things is a tangible way for them to stay on budget.
Lesson #4: Save for the Future
Another important aspect of financial success is saving and investing for the future. Kids can develop their savings muscle by putting away a percentage of their earnings, whether that's through an allowance or a job. A good rule of thumb for adults is to save 10 to 15 percent of your income,5 so encourage kids to start there.
One way to make saving more tangible for students is to set a savings goal. Younger kids may want to start small by saving for a toy or new game. Make a game of saving by creating a visual chart so they can track their progress. Parents can introduce teens to the concept of an emergency fund, or a rainy day fund. For teens, an emergency may be replacing their smartphone screen, but it's great practice to sock money away for unexpected expenses.
Of course, if you're going to save money, you need somewhere to put it. A high yield savings account is an ideal place for your kids to grow their long-term savings while also earning an above-average interest rate. You need to be 18 or older to open a regular account, or as a parent, you can create a custody account for your child. If they're interested in investing, BusyKid® is an app that lets teens learn how to invest with as little as $10.
READ MORE: Types of Savings Accounts for Kids and How to Get Started
Lesson #5: Manage Debt
Understanding and managing debt is an important aspect of financial literacy, as few of us get through life without accumulating some debt.
Understand credit
Part of managing debt is understanding credit. Next time you're buying something online with a credit card, walk your kids through how different types of credit work. Explain that it's essentially a loan from a financial institution that you must pay back in full. Teens should also know that if the amount isn't paid back in full by the due date on their statement, they'll be charged interest on the remaining amount.
Kids should understand that borrowing and spending more money than they earn will lead to debt, and interest can snowball into further debt . That's why it's important to have frank conversations with kids about Buy Now Pay Later (BNPL) financing. Even if it's interest-free, teens could end up in more debt than they can manage.
Explain how a credit card works
Talk to kids about credit cards before they're old enough to apply for one. A credit card can be a great financial tool when used strategically. Using a no annual fee credit card like the Synchrony Premier World Mastercard® can help them build their credit history and earn cash back on everyday purchases. Opening a prepaid credit card is another way teens can learn how to manage debt responsibly.
Don't spend more than you earn
Some tips to help students manage debt: Only borrow what you can afford to pay back, pay your bills on time and create a budget. A zero-based budget is a simple way for teens to assign every dollar to a spending category, so they can practice spending without going into debt.
In addition, your teens can try MoneySKILL®, a free online course for middle school and high school students that covers a myriad of finance topics, including credit cards and other unsecured borrowing.
Success Starts Now
Equip kids with knowledge of personal finance and give them the opportunity to put their skills into practice. By earning their own money, having a plan to spend it and saving for their future, they can go from using training wheels to becoming financially independent adults.
Amanda Lee is a freelance writer based in Canada. She writes about finance, parenting and lifestyle. Her work has appeared in the Toronto Star, Today's Parent, This Magazine and others.
READ MORE: Teaching Kids About Money and Saving for the Future
