5 Ways to Build Financial Literacy in Your Children

What’s in this article:

• Provide opportunities to practice making spending decisions
• Talk about your financial decision-making
• Show your children the value of saving and investing
• Demonstrate the debt trap
• Lay the groundwork for earning success
• Closing thoughts

For many of us as children, we saved money in a jar or piggy bank, rode in the grocery cart while our parents shopped, tried on back-to-school clothes at the mall, and hunted the toy aisle trying to decide how to spend our allowance. But the world of earning, saving, shopping, and spending looks very different for today’s young generations; technology hides much of the process behind apps and online transactions. Many kids just see groceries loaded into the trunk of the car and packages delivered to the front door, as if by magic. The exchange of money is nearly all invisible. When my young daughter told me she could have whatever she wanted delivered to the house by just going to the internet and selecting it, I knew we were going to have to be intentional in helping our children build financial literacy in this new landscape.

Here are five different paths we’ve used to help our children learn and cultivate good financial habits:

1. Provide opportunities to practice making spending decisions.

To learn anything requires hands-on practice. This is where an early allowance comes in—it’s about more than just providing pocket money; it’s also about helping them learn about budgeting, making trade-offs, and saving for something they want. We decided that our weekly allowance needed to provide enough money that our children are able to make real decisions about how to spend it: they should be able to purchase something small that they want with their allowance, or save over several weeks to buy something of greater value.

The important thing is that they have the experience of weighing their purchase decisions and putting off immediate gratification in favor of something they may want more. It’s the first step in helping children learn about the value of money—the practice from these early decisions will help set the stage for more difficult decision-making later in life.

One key aspect of an allowance program is allowing your kids to make mistakes. It’s true; there will probably be times when they make a purchase they regret or end up falling short when there’s something they want. Having that experience is important too.

2. Talk about your financial decision-making.

With so much of our financial lives occurring in the hidden world of cyberspace, it’s that much more important to talk to your children about money and include them in your processes and decisions. Those conversations are the window through which they will learn what to think about when choosing how to spend their money, how to plan ahead, and why it’s important to save and invest.

There are lots of opportunities in everyday life to bring up these concepts. Let your kids help when you order online, sharing your thought processes when you make choices around balancing needs and wants, evaluating cost, comparing prices, assessing quality, and selecting brands.

Many kids start noticing wealth differences when they visit friends or family who might have different lifestyles than what’s familiar at home. If they see families with lots of “stuff,” that might be a great opportunity to talk about the difference between building wealth and spending money. Help them understand how evidence of spending doesn’t necessarily translate into being wealthy or building long-term security.

You can tailor your conversations to your child’s age, offering big-picture, simple ideas when they’re younger and then going into more complex detail as they mature. I have always been surprised at how interested my kids are—they are curious about this invisible world and how it works, and often ask plenty of questions.

3. Show your children the value of saving and investing.

The concept of compounding may be beyond the grasp of a six- or seven-year old, but seeing their money grow in real life can definitely make an impact. Taking your kids to the bank and opening a savings account can be an exciting event; ask your bank or credit union about savings accounts that offer high interest rates (sometimes they have special offerings for young savers). Looking at your children’s bank statements with them and showing them growth over time is a great way to incentivize saving and patience. That is a lesson that will serve them for a lifetime.

4. Demonstrate the debt trap.

Understanding the dark side of compounding is just as important, especially in an age where credit card use is near-universal and buy now pay later (BNPL) installment plans are becoming ever more popular. This may not be a conversation for little ones, but as they get older, it will be important to incorporate debt into the discussion. Nearly every item on Amazon has an option to pay in installments and there are numerous apps catering to the younger crowd that offer paycheck loans and buy now pay later borrowing plans. Your kids will likely start receiving offers of credit before they even graduate from high school.

In your conversations, distinguish between good debt and bad debt. Good debt, like a mortgage or business loan, can help you buy something that may appreciate and grow in value. If your asset will earn more than the interest you’ll pay over time, that’s good debt. And it’s important to recognize that there are advantages to using credit cards for everyday purchases, such as tracking, spending protections, and point or mile benefits. But falling into debt that you can’t pay back and using credit to live beyond your means is a trap that warrants a warning. A great way to make this real is to look at the actual cost of things when you pay over time with interest. Use an online calculator like this one to sit down together and explore different scenarios to find out how much debt actually costs. Definitely do this when you start thinking about college! (Read “Does College Pencil Out: An Examination” for more on the cost of college.)

Some parents allow their kids to borrow against their future allowance, both to provide some experience of what it’s like to have to dig oneself out of debt—and also to sometimes help them buy that one thing they just can’t live without! If you go this route, I suggest having your child track the payments and debt as an exercise in responsibility and accountability.

5. Lay the groundwork for earning success.

Earning money can be a deeply rewarding and fulfilling experience, even—and maybe especially—when it requires hard work and sacrifice. Whether you task your children with chores tied to their allowance and/or give them odd jobs to earn extra cash, those early money-making opportunities can help them develop an appreciation for work.

Give your children age-appropriate tasks that require them to put in effort but that also allow them to excel and demonstrate when they’ve done a good job. Asking them to sacrifice some amount of playtime or screen time in order to fulfill their duties helps them understand the value of their time and attention, and can make their ultimate earnings feel more meaningful because they sacrificed something for it. As they get older, they can take on more difficult and labor-intensive work and further grow their work ethic.

If you can find tasks where they can not only find satisfaction in doing well but are also appreciated by others, that adds another layer of fulfillment. By making a visible difference, as with mowing the lawn, washing windows, or detailing the car, everyone can see and appreciate their accomplishment.

Closing thoughts

In past generations, children used to be able to pick up some financial knowledge and habits just by being with their parents as they saved, balanced their checkbooks, paid the bills, and did the shopping. With most of those things now done on a screen, kids have less opportunity to absorb by osmosis, making it that much more important to engage them in other ways. One of the best things you can do is to talk to your children—in age-appropriate ways that shift over time as they mature—about your own financial values, habits, choices, and decisions. Another is to provide them with opportunities to practice earning, saving, and managing money. Most importantly, be intentional and actively seek out ways to help your kids build a strong financial foundation.

Watch Coldstream’s recent Ask the Expert podcast, “Setting Up Young Adults for Financial Success,” where we interview Financial Beginnings CEO Ronecca Norvell about how to teach and empower young people to be both financially literate and financially confident, to learn more about helping kids build financial literacy.

This article is for informational and educational purposes only and does not constitute legal, tax, or financial advice. Readers should consult with qualified professionals regarding their specific circumstances.

Coldstream Wealth Management is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.