By: Michael Pearl
The world is beginning to embrace the idea of a cashless economy, and it’s raised some interesting questions about how we impart financial knowledge to our children.
A 2015 financial literacy assessment by the Programme for International Student Assessment (PISA) found that just under 80% of young people aged 15-24 made payments online. And a 2015 Standard & Poor survey found that only 57% of U.S. adults were financially literate, with a solid understanding of key concepts like inflation and interest.
That’s a troubling combination.
But the 2017 Parents, Kids, & Money Survey conducted by T. Rowe Price found that parents who discussed financial topics with their kids were more likely (61% vs 41%) to have kids who say they are smart about money.
“Young People still need to be taught the basics,” says Dan Kadlec, contributor to TIME Magazine and Rightaboutmoney.com. “Live within your means, pay yourself first, save 15% of what you earn. These are timeless values that technology can help with – but only once you understand the need and set a plan into motion.”
With Generation Z – also known as Digital Natives – beginning to come of age, it’s time to combine tried and true financial wisdom with modern solutions to teach our children how to survive, and even thrive, in a world without cash.
Table of contents
Introducing money: Ages 3-6
How people spend: Ages 6-10
Introducing consequences: Ages 11-13
Building wealth: Ages 13-15
Preparing for the real world: Ages 15-18
Entrepreneurship: Age 18+
Introducing money: Ages 3-6
At this point in your child’s cognitive development, he or she should begin to understand the concept of counting, so it’s the perfect time to introduce them to the general concept of money.
During these initial lessons, we recommend holding off on abstract concepts like credit and sticking to physical dollars and coins. “Forcing children to pay cash makes them feel an immediate connection between their spending and their budget,” says Walt Gardner, Reality Check blogger at Education Week. “It also tends to impress upon them the importance of saving.”
According to Tracie Fobes of Penny Pinchin’ Mom, “The reason kids love coins is that it feels more real to them. They can slide the coins into their piggy banks. Not only that, but when you use coins, you can start to teach them how to add them to total another value. For instance, you can teach your child that ten dimes are the same as one dollar.”
There are four essentials your child should learn at this young age:
Of course, your 3-year-old can’t work a job to earn money, but they can earn an allowance by completing simple chores, like making their bed or cleaning their room. Be sure to tie their allowance to completing every chore. If they’re not 100% done by the end of the week, they don’t get paid.
Learning how to spend responsibly empowers your child while honing decision-making skills. Kids tend to consider their spending choices more carefully when they’re spending money they’ve earned, as opposed to money they’ve been given. But when your child purchases something, make sure they know they’ve earned it. Whatever the purchase, it belongs solely to them.
As your child begins to earn their own money, they’re going to learn that some items are more expensive than others and that people must save what they earn to reach larger goals. If they’re impatient to make a costly purchase, offer them extra chores or agree to match a certain percentage of their earnings if they save. (But don’t bail them out or offer more money for the same effort.)
Introducing charitable habits at an early age can be rewarding for both you and your child. Giving to charity is shown to have pleasing effects on the brain, just like the knowledge that your child is happy. Teach your children to give 10% of their money to help others, and it’s a habit they’ll keep all their life.
There’s one more benefit to introducing finances at a young age: learning core math skills. Says Nancy Phillips of Thewelaway.com, “Learning to divide up earnings in cash when they’re young gives [children] practice doing everyday adding, subtracting, multiplication, division, and percentages: mental skills many children and teens aren’t effectively learning anymore.”
Apps that can help
There’s a whole slew of apps dedicated to introducing numbers and mathematics to kids, but one of my favorites is DragonBox Numbers. The app combines brightly-colored characters and engaging games with Cuisenaire Rods (a classic math education tool) to give kids an understanding of fundamental mathematics without the need for memorization.
If you’re looking to emphasize your child’s financial knowledge instead, check out Savings Spree. It’s an addicting, vibrant app designed to show children how quickly costs can add up, reinforce saving, and introduce the idea of unexpected costs.
How people spend: Ages 6-10
Beginning at age 6, children begin to understand cause-and-effect relationships, and that changes the way they perceive money. By this point, your child can probably see that:
- Money is directly tied to items
- Parents work for money
- Money is spent differently (smaller items, like a book, may only require one purchase, while larger items, like a house, require multiple payments)
- Some purchases are made without physical money
Maybe your child has gone on a few playdates and has noticed that other families have bigger houses and smaller cars, or vice-versa. This can lead to some difficult questions. It’s possible to answer those questions head-on, while building on your child’s financial knowledge.
Introducing differences between types of spending can help children gain an understanding of how others spend their money, while laying the groundwork for building budgets in the future:
- Goods vs. services
- Needs vs. wants
- Short-term vs. long-term goals
Goods vs. services
Money isn’t always spent on physical items (goods); sometimes it’s spent in return for another’s efforts (services), and it’s important for children to understand the distinction. With more abstract goods and services made for the information age, such as apps and streaming services, the line between the two may blur. Use your child’s passions to illustrate the difference: If your child loves games, explain that the game itself is a good, while the developers that made it provided a service.
This is a good time to introduce your child to the concept of work – that people get paid for creating goods and providing services. It’s also an opportunity for your child to get to know you a little better. Explain what you and your partner do to earn money.
Although you should give your child an annual raise in their allowance, if they want more, you can consider complicating their chores and paying them more money as a result. “In addition to handling cash for wants,” says Lena Gott of Whatmommydoes.com, “you can also let them do budget-related household tasks, like planning a week’s worth of meals and actually shopping for the groceries while sticking to a grocery budget.”
Needs vs. wants
“Emotion is the real reason most consumer purchases are made, and vendors know that,” says Nancy Phillips. Ads are becoming increasingly personalized, and it’s crucial to establish a distinction between emotional purchases (wants) and necessary ones (needs) as soon as possible. If you’re comfortable with the concept, show your children some of the bills you pay monthly, and establish that even the house they live in isn’t free.
It’s also a good time to teach your children that different families have different needs. For example, larger families may need bigger houses and cars.
Short-term vs. long-term goals
Explaining to your child that you make monthly payments towards the cost of a house is a great way to introduce the idea of expense, and of short-term vs. long-term term goals. If your child has something expensive on their wish list, establish that it’s a long-term goal, and encourage them to save up.
Bobbi Rebell, author of How to be a Financial Grownup and of Bobbirebell.com, offers the following example: “I ask my 10-year old: Do you want to buy a snack after school, or do you want to take a taxi and have a snack at home? Or maybe we should just save the money, and we can use it for an activity we are saving up for?”
Apps that can help
We’re about to dive into the world of digital currency, so now’s a good time to bridge the gap between the physical and the abstract. Using allowance apps like iAllowance while still distributing their allowance in physical money is a great way for your child to make the connection that the numbers on the screen represent real value.
iAllowance helps children set their money aside for specific goods and services that they want, while parents still maintain full control. Once you feel your child is ready, you can make the switch to digital currency.
Introducing Consequences: Age 11-13
When a child reaches his or her tweens, they begin to develop a sense of reason, long-term consequences, and complications, transforming from emotionally-driven to rationally-driven decision making. At this age, a child begins to desire independence, spending more time with their friends instead of their parents. Tweens spend about six hours on average consuming media, and financial peer pressure is a very real force. “Once they are old enough,” says Bobbi Rebell, “hand over the phone to let them pay for things digitally (with your supervision).”
Once your child has a firm grasp of the basics, it’s time to finish the transition into the cashless world. But don’t just introduce e-commerce apps like PayPal or Venmo. Use this time as an opportunity to expand their financial knowledge to include long-term consequences:
- Identity theft
According to the BusyKid Blog, it’s a good idea to “use the mentality that if you can’t afford to pay cash, you can’t afford it. If you do choose to use credit cards, make sure you’re paying them off in full each month.” There’s plenty of ways to introduce kids to credit without putting their financial future (or yours) at stake.
If you’re looking to establish a strong credit score for your child, consider making them an authorized user on your credit card. Parents still retain control over the account, and some cards offer spending limits for authorized users. You’ll be able to see all the purchases your child makes and follow up when reminders are needed.
“One thing that works to teach kids is to create your own ‘debit’ card,” says Tracie Fobes. “You can pay your kids an allowance on their card and have them record the balance – without handing them cash.”
Be sure that your child makes payments at the end of every month. If your child ever goes over budget, then take what’s owed out of their allowance apps – with a little interest (more on that later).
Kids growing up today will come of age in the shadow of The Great Recession, so they’re actively aware of debt: Generation Z holds the lowest average credit card debt of all current generations. But when it comes to keeping track of spending habits, there’s still a generation gap. “If you are over 40,” says Dan Kadlec, “you were taught that the best way to restrain and track spending was by using cash and saving the receipts. Spending cash was painful because you had to part with the physical currency and felt the loss.”
If you have firsthand experiences with debt, don’t feel embarrassed to bring them up to your child – your knowledge is more valuable than the abstract concept of owing money. If your child is an authorized user on your credit card, utilize your credit card company or bank’s app to keep an eye on your child’s spending habits – and consider setting spending limits if your bank allows it.
Any lesson on interest should boil down to one concept: Interest means that money grows in value over time. As a result, interest can be your best friend or worst enemy – because both debts and savings (when placed in a bank) accrue interest.
Don’t throw out those allowance apps just yet. Instead mix them with credit card or bank apps to keep track of how much money your child currently has, while showing how much they’ve spent. Treat allowance apps like a personal bank account. If your child saves his or her money, consider matching it to an agreed-upon percentage.
Conversely, if your child overspends on a credit card, and/or fails to make payments before the month is up, take the payment out of their account, along with a little extra as interest. Then follow up with a conversation to drive the lesson home.
Keeping track of your expenses and learning how to plan for your future is a tenet of financial literacy. With extra money from chores and gifts accruing interest, it’s time to take stock of your child’s spending habits and compare them to the short- or long-term goals they have. At this age, all your child’s spending goals should be want-based, so it’s a great opportunity to teach them about monthly profits and losses without harsh consequences.
Utilize allowance apps or old-fashioned (by information age standards) database software such as Excel or Google Sheets, and break the budget up into four categories: income, savings, spending, and goals. Review the budget with your child regularly and determine whether they have more money in their account (profit) or owe money (loss) at the end of each review.
But most importantly, let them fail. “Help them save towards things they really want, and let them make mistakes – they will blow their money on dumb stuff and regret it!” says Phil McGilvray of Grandma’s Jars. “Whatever you do, don’t bail them out. Once they get into their mid-teens, you must give them bigger opportunists to manage money and fail.”
One last stop before they log on. Protecting personal information is as much a part of financial literacy as is spending and saving. Your children may have a device that you can’t control: one-third of all middle and high school students can access a school-issued mobile device. Chances are, your kids are more tech-savvy than you (yes, even at this age), but there are still steps you can take to help them protect their identity online.
Keep an eye on your child’s social media accounts, but also explain why popular services like Facebook and Instagram are free – namely, the process of data mining. Make sure their phone’s geolocation is off, and know if their posts are geotagged. Inform them of the dangers of sharing personal information while on public wi-fi. Lastly, check out the security pages of popular e-commerce apps like Venmo and PayPal.
Apps that can help
Bankaroo offers a virtual bank designed exclusively for children. It’s like an enhanced allowance app: Parents have full visibility of their children’s finances, can set goals, and can enter in a set amount for annual allowances. But parents can also match a percentage of their child’s savings, ensuring that their money earns interest. There’s even a school version, made just for teachers.
Beat the Thief, designed by the Center for Identity at the University of Texas at Austin, is an engaging game that teaches kids the essentials of how to protect their identity online. Points are earned by sharing information safely – but give away personal info, and a cartoon burglar creeps closer and closer towards your home. Once he’s in, it’s game over.
Building wealth: Ages 13-15
When tweens turn into teens, they begin to grasp abstract concepts and develop a sense of long-term consequences. Teens also hone memory and the capacity for reason, while actively beginning to distance themselves from their parents. Your child is going to start identifying more with their friends and other social groups, so it’s the perfect time to let them spread their wings.
Introduce the following financial concepts to reinforce your teen’s independence, and help them find a financial identity outside of your watch:
- Investing (bonds vs. stocks)
Your child has a concrete understanding that money comes from hard work, but until this point, they’ve only earned money through chores, while their parents are watching over them. Finding a job separate from parental control reinforces a sense of responsibility in teens, and it looks great on a college application.
Teens don’t necessarily have to work on their feet: Freelancing sites like Fiverr will allow teens to join at 13 years old, although sometimes parental consent is necessary. (It’s also worth mentioning that these sites issue payment via e-commerce apps, so if you haven’t gone over identity theft with your child, be sure to do so.)
Once your teen has some money of his or her own, it’s time to open their first bank account (if you haven’t already).
Contrary to common belief, banks aren’t going anywhere anytime soon. 84% of bank customers ages 18-34, including millennials, have visited a teller at least once in 2016. Even if banking ultimately becomes a purely digital experience, it’s essential to understand exactly who is keeping your money safe.
You may have brought your child with you to the bank before, and now’s the time for them to open a separate (but monitored) account for their savings. Many banks have accounts exclusively tailored to kids, and as we’ve reported, a good bank account for kids should meet the following criteria:
- No minimum balance requirement
- No monthly maintenance fees
- Online account management
- A high interest rate for savings (the best offer 1% or more!)
When choosing your bank, consider opting for one with a local branch so you and your child can visit and ask questions if need be.
At this point, your children understand how to earn and save money, budget for the future, and keep their savings safe in a bank. Now it’s time to teach them a little risk. Keep the lessons simple. People have two options if they want to invest their money – bonds and stocks.
Present bonds as the safer option. You’re essentially giving the government a loan to be repaid later. The rate of return isn’t high, and it takes more time for bonds to accrue any real interest. But, short of the government defaulting, there’s far less risk in bonds than there are in stocks. Edward Jones keeps an up-to-date chart of current bond interest rates.
Associate stocks with higher-risk, higher-reward scenarios. Purchasing stocks means purchasing small shares of a company, where the value of the stock depends on the health of the company. Be sure to hammer home the buy low, sell high mentality, allow your children to make small investments, and allow them to make mistakes.
Apps that can help
It’s likely your local bank has an official app, with the ability to track your child’s spending habits. Many banking apps will also send alerts if your child is spending too much, or if they’re running low in their account. You’re able to have as much or as little oversight as you desire on your child’s spending.
When it comes to investing, the Acorns app is one of the best introductions there is. According to Dan Kadlec, parents and teachers must “embrace new tools like Acorns and other savings apps if they want to remain relevant.” Acorns is a micro-investing tool: connect a credit card, spend like normal, and the app will automatically invest any spare change from each purchase (rounded up to the nearest dollar). Your teen will be able to choose between different classes of stocks or bonds, with minimal financial risk.
Preparing for the real world: Ages 15-18
Mid-to-late teenagers can process complex problems and fully imagine the future consequences of their actions. By now, your child has a solid foundation of financial literacy — from the essentials to more complex ideas of growing wealth. It’s time to talk about the biggest expenses they’ll likely ever have (barring children of their own).
Per a report published by Pew Charitable Trusts in 2015, approximately 80% of Americans “hold some form of debt, whether mortgages, car loans, unpaid credit card balances, medical and legal bills, student loans, or a combination of those.”
With college on the horizon, have a discussion with your children about taxes, good vs. bad debt, and how handling them responsibly can empower their financial future.
If your child is working a part-time job, then they’ve already run into taxes. They may or may not understand the basics – that their money is going towards state and federal programs. What’s more important is to teach your children how to file their taxes.
There’s plenty of tax apps on the market, many of them provided by name-brand accountancy firms like Turbotax and H&R Block, but even they can’t cover all the basics. If you need help teaching your teenager about taxes, the IRS has a student portal designed to help total beginners understand the hows and whys of taxes.
Good debts are essentially long-term investments in assets that increase a person’s overall net worth, such as:
- Student loans
- Car payments
As Forbes reported earlier this year, mortgages and student loan debt are still the largest and second-largest consumer debt categories, respectively. The good news is that current high school students are taking loan debt seriously, displaying a willingness to take gap years to earn money or attend less expensive community college programs to earn college credit.
When it comes time to take out a loan, do your homework with your teen – there’s a wide variety of student loan options, and a variety of lenders with strong web and mobile presences, offering competitive rates. Once you’ve found the lowest rate, be sure your teen doesn’t accept any more than they need to. They’ll be paying it back with interest just as they’re about to start their career. And of course, encourage them to make payments on time.
While mortgages are just a blip on the horizon, you’re still able to impart the same basic knowledge gained from finding the best student loan: Do your homework, find the best rate, and always pay on time.
Debt doesn’t care about flash, so when your teen is looking for their first car, make sure to ask the question: new or used? Newer cars depreciate more quickly but are more reliable, while used cars cost less but could require costly maintenance. Kelley Blue Book is still the definitive voice in new and used car pricing, an essential tool when shopping for a new car.
Whereas good debts are assets, bad debts are liabilities. They aren’t investments, and not paying them off can have serious consequences on a person’s credit history:
- Credit card debt
- Payday loans
- Car payments
- The unforeseen
Your teen likely understands that they should only get as many credit cards as they can pay off at the end of the month – but sometimes unexpected expenses can push us over our card’s limits and past our payment dates. Once they’ve missed a payment, not only does their credit score suffer, but the card’s APR kicks in, meaning they’ll have to pay even more due to interest.
Teach your child to avoid payday loans if at all possible. Payday loans are notoriously predatory, and their APR is far too high. Teens should only ever consider a payday loan if they face a truly desperate situation (and in that case, you may want them to come to you first).
Car payments are a grey area between good and bad debt. Car loans actually count as a liability against a person’s net worth. New cars depreciate by 10% the minute you drive off the lot, and by a minimum of 10% annually after that. It’s better, financially, to try to keep a well-working car for as long as possible, or to only opt for a new car when you’re sure you can pay for it.
Unforeseen expenses include medical emergencies, maintenance for cars and homes, rising bills, and unemployment – all things your child should take into consideration before making major purchases.
Credit scores and credit reports
This is the last step in building a foundation for financial literacy. Now that your child understands the concept of credit, you can introduce them to FICO.
If your child’s been making monthly payments towards a credit card, then he or she should have a starting credit score, and paying off student loans and credit scores can help. Contrary to popular belief, it’s possible to check your credit score without harming it.
Once you see your child’s credit score, you can explain what goes into determining it:
- Payment history
- Amounts of debt
- Length of credit history
- New credit
- A mix of credit card and loan debt
If your child’s credit score is low, it’s because they haven’t established much financial history yet. Make the connection between paying off good debt and building credit. The low interest rates that come with good credit will make future loans easier to pay off and can result in big savings on a car or home loan.
Apps that can help
The MyFICO app is a popular choice for checking credit scores regularly. It offers up-to-the-minute information, plus alerts about credit changes or identity threats.
PCMagazine calls Mint “the best personal finance software hands down,” and it’s not hard to see why. Setup is simple, and users get a comprehensive view of their finances in seconds. Your child will have to connect a few accounts, but almost immediately, Mint will provide a thorough analysis of his or her finances. It’s a great tool for identifying spending trends and spotting opportunities for improvement.
Entrepreneurship: Ages 18+
Many believe that the essence of financial literacy is to instill fiscal security for their children in the future. Wise practices and conservative choices can give your adult children the ability to weather difficult financial times on their own. But there’s another benefit: confidence.
Once someone has a comprehensive understanding of the way personal finance works, they’ll have the confidence to make bolder moves when they’re older. Even Warren Buffett teaches children about the connection between financial literacy and starting a business. And he’s admitted that kids today know more than he did growing up.
That’s a good sign.