Parents, it’s your responsibility to teach your kids financial literacy or they’ll have to learn the hard – and expensive – way
Parents want what’s best for their kids, especially in regards to their future.
What a shame then, that one of the most highly correlated predictors of success in adulthood is one of the least talked about topics in the world of parenting – financial literacy for kids.
Financial literacy is on the decline
Financial literacy in the U.S. has been on the decline for the better part of two decades. The consequences of that have been the stuff of headlines.
The problem is likely to get worse: A study released earlier this year by the TIAA found that only 16% of Millennials qualify as financially literate.
And it costs them dearly….literally. On average, millions over the course of their lifetime.
But where there is a problem, there is an opportunity. In this case, that opportunity is that a comprehensive financial education becomes a strategic advantage in life.
After all, who wouldn’t want to give their sons and daughters a leg up over 84% of the population?
We all know things aren’t getting any easier – let alone what the future holds.
Don’t rely on school to teach kids about financial literacy
Only 21 states in the U.S. require personal finance coursework in public schools. Believe it or not, that’s actually a significant improvement from just two years ago.
Still, most requirements are minimal. A majority of states have no curriculum in financial literacy at all.
Like it or not, the reality is that the responsibility of financial literacy for kids falls squarely on their parents.
Financial education in the school of hard knocks
Most people earn their financial education the hard way: A slow, painful process in the strict and unforgiving classroom of the real world.
Lessons here come at a hefty price: deflated credit scores that haunt for seven years, debt that seems to never go down despite monthly payments (that aren’t always easy to make, especially in early adulthood), and tricky ‘offers’ that are essentially financial booby traps.
But in the depths of the convoluted fine print, most of these ‘offers’ capitalize on money management blindspots.
In recent years, the world of finance has grown even more labyrinthian – predatory even. Many products are specifically designed to exploit (and profit) from widespread gaps in financial literacy.
It’s a cruel and costly learning curve.
But parents who understand the importance of financial literacy for kids can flatten that curve. They can introduce basics on how to manage money at an early age. Then they can build on that foundation with more sophisticated concepts over time.
Financial literacy during the Wonder Years
Explaining how indexed annuities work to a 2nd grader will unsurprisingly be met with blank stares. But there’s no reason we shouldn’t expect the same from a young adult who hasn’t learned foundational concepts like investing, compound interest, and the importance of taxation timing.
Of course, not all at once. But the earlier a financial education framework is introduced, the more time the investment will have to mature.
As with all things in life, the basics come first and early.
That aforementioned 2nd grader probably can grasp the Bank of Mom and Dad depositing an allowance into an account.
Over time, an allowance account offers many learning opportunities on managing money – from delayed gratification (‘you can get the NERF ball now, or wait another 2 weeks to get that bike we saw’) to basic principles of fixed income.
Parents can share visibility into an investment account as children enter early adolescence, such as a college savings account. That way, their preteen can see first-hand how small investments can lead to big payoffs.
Calibrate your expectations: Though they might not seem especially interested at first, once that investment grows into real money, they’ll likely change their tune.
This is also a great time to start familiarizing them with things such as personal credit scores.
By the time they’re in high school, they will have witnessed what Einstein called the ‘eighth wonder of the world’: The power of compound interest.
From there, it is only a small logical step to understanding how compound interest can work against them in the context of debt.
But nothing quite beats the real thing. High school is also a time where kids start wanting big-ticket items, such as a car or a trip with friends. These wish list items can serve as the basis for the mechanics and implications of debt.
Their financial education can mature in tandem with them.
Parents bridge the classroom and the real world
What makes early exposure to financial literacy for kids so vital is the bridge it creates between the math they learn in school and how it applies in the real world.
Consider compound interest – arguably one of the most important engines in finance – is taught in 7th grade. It is not easy to recall when they’re applying for a credit card or deciding how much to contribute to their 401k.
But with first-hand experience watching an investment account grow over time, they’re more inclined to make financially savvy choices while time is on their side.
The idea is to find teachable moments along the way – life is chock full of opportunities to deepen your child’s financial literacy skills.
Financial literacy isn’t just math, it’s mindset
Understanding the numbers and math that go into financial products on the market today is an integral part of financial education. The more elusive piece of the puzzle is often the psychology around money management and growing wealth.
Financial philosophies, such as “pay yourself first” and “being poor is expensive,” aren’t taught in schools, even those that offer personal finance coursework.
But mindset, attitude, and strategy all impact wealth accumulation outcomes. Parents can help their children to see money as a tool, not a master.
Early bird gets the worm
Parents who want to see their children succeed shouldn’t rely on the school to teach them financial literacy. Instead, they have to take a proactive approach in their child’s financial education.
Perhaps the most important role a parent can play in their child’s financial literacy is helping their children bridge the conceptual to real-world application.
As with most investments, time is a variable. But kids have the benefit of time on their sides.
Early investment in financial literacy for kids ensures that when the time comes for them to fly the nest, they’ll have a little more lift under their wings.