How To Teach Financial Literacy

They used to say kids would learn the “three Rs” in school: that’s reading, ‘riting and ‘rithmetic. But these days, plain old arithmetic (or math) isn’t enough. Finances are in a mathematical world all their own, and financial literacy is the understanding and use of skills that promote a responsible relationship with money.

Financial literacy is finally being taught in schools, and many parents are also teaching it at home, because it’s crucial for kids to have a foundation of how financials work before they head out into the world on their own. After all, how else will they be able to manage their income, pay bills, buy groceries, and save for a rainy day?

Unfortunately, many adults today didn’t have the opportunity to become financially literate early on, because it wasn’t being taught in schools, and their parents may not have been able to fill that void. So it’s important for people of all ages to understand financial literacy and the concepts related to it.

The Importance of Financial Literacy

If kids don’t learn financial literacy, they don’t always make the best monetary decisions. For example, student loan debt for college graduates has increased steadily over the years, at a rate of around $10,000 per decade. In 2004 the average student debt was close to $19,000 and in 2014 it had risen to nearly $29,000. At the end of 2022, the average federal student loan debt was almost $38,000.

These stats point to a possible lack of financial knowledge among young people. Because even though you generally don’t have to make student loan payments while you’re in school, the money you borrowed usually still racks up interest. That makes it a really good idea to make some kind of regular payments from day one, even if it’s just to cover the interest as it accrues.

Think about it: a $100,000 loan with a 5% interest rate is going to cost you $5,000 per year in interest alone. And that increases each year if you let it compound. But paying off that $5K, or more if possible, keeps the loan at a more manageable level.

Graduating from school and facing life with a mound of debt is hard to fight your way out of. But becoming financially literate helps you avoid these types of situations, stay on top of your finances, and even build wealth for the future.

Important Concepts to Address

Student loans aren’t the only thing that can be better understood and handled with the right knowledge. There are several concepts that should be addressed in basic financial literacy education, because knowing them is crucial to living a well-adjusted life.

Budgeting

Nearly every financial expert will tell you budgeting is important. It’s also a task most people choose to ignore. But budgeting is an important part of financial literacy because it ensures you have enough money for what you need without constantly going further into debt.

There are several different budgeting systems you can use to keep your financials on track, whether you prefer to allocate yourself a pool of funds in advance or divide up your income by wants and needs.

Saving

Once upon a time, parents would open a savings account for their kids, who then got to deposit their birthday money and watch the interest grow. These days, most regular savings accounts pay very little interest, so it’s more like watching paint dry.

However, there are still ways to teach your children about compound interest, which Einstein called mankind’s greatest invention. Look into “high-yield” or “high-interest” checking and savings accounts for above-average returns on your money. While some might require a minimum deposit, you can find plenty of $0 offerings, including some online banks that offer higher-than-normal interest if you meet certain conditions.

Credit

Credit is a mystery to many, but it’s definitely worth learning about. There are several topics around credit that will make your life easier if you know how they work.

• Credit scores range from poor to excellent, and having good credit means you’ll get more favorable terms on credit cards, car loans, mortgages and more. There are two credit scoring models with slightly different ways of measuring and creating your scores.
• Credit reports provide historical credit data that’s used to figure out your credit score. There are three credit bureaus that collect info on you and compile credit reports.
• Credit cards operate through several networks—including Visa, Mastercard and American Express—and are available from various banks and for different credit score ranges. They also might have a specific focus, like dining, travel, everyday purchases, or building credit.

Beyond this trio of big credit concepts, there are nuanced details you should dig into as well. These include how to increase your credit score, how to protect your credit score, how to fix your credit report, and how to avoid credit card scams.

Debt

Nobody likes debt, because you owe money that’s quite likely multiplying faster than you can keep up with payments. Financial literacy involves learning about different types of debt, like revolving debt (credit cards and lines of credit) and installment debt (loans and mortgages).

Carrying one type of debt impacts other areas of your financial well-being too, so it’s best to learn early how to keep it under control. There are various proven ways to manage debt, including debt consolidation and various debt reduction strategies.

Investing

Investing involves buying assets that can increase in value and turn a profit. Although a positive return on investment (ROI) isn’t guaranteed, the end goal is to make money. Your risk tolerance comes into play here, because bigger returns—or bigger losses—usually come from riskier investments in more volatile markets. Various investment types include stocks, bonds, mutual funds, and high-yield cash investments like money market accounts and certificates of deposit (CDs).

Activities for Teaching Financial Literacy

Sprucing up your financial skills doesn’t have to be boring. There are plenty of activities that let you (or your child) have fun and be productive while learning the key concepts of financial literacy.

Offer Them an Allowance in Exchange for Work

Sending youngsters into the world to work is child labor, but paying them to do work at home is a foundational learning experience. Choose some chores that are age-appropriate, and give your kiddo a weekly allowance to complete them.

Consider building in a bonus structure that rewards them for doing additional work. And if they don’t do the chores one week, hold back the allowance. This tried-and-true system teaches kids how to budget, save, and be careful with their money. If they impulsively blow it all on games or candy, explain how always choosing instant gratification means they have nothing to put toward that new mountain bike or skateboard.

Help Them Find a Part-time Job

If your child or teenager is old enough to get a job outside the home, part-time work is a great way to learn about budgeting and saving for the future. Working in retail or fast food are popular options, but you can also suggest a paper route, dog walking or lawnmowing service, which have the added bonus of helping kids learn how to run a small business.

Practice Investing

You don’t want to just throw money at the stock market to see what sticks. There are lower-risk ways to learn investment skills, or teach them to your kid, before playing in the big leagues.

Various apps and online services offer fractional shares, which are little slices of company stocks. Or you can open a brokerage account to practice investing small amounts in stocks, bonds, mutual funds and exchange-traded funds (ETFs). You can also use a virtual portfolio—also called a practice or dummy portfolio—to study the art and science of making trades and earning an ROI without using real money.

Apply for a Credit Card

It’s difficult to go through modern life without a credit card, even though you can use a debit card for many types of purchases. But credit cards are different, and learning to manage credit is a crucial skill.

One way for kids to learn about responsible use of a credit card is to make them an authorized user on your own account. However, that requires trust, because you’re liable for whatever they purchase. But if they’re at least 18 (or preferably 21), you can help them apply for their own credit card. Researching different cards provides a great opportunity to compare the pros and cons while discovering the required qualifications to get a card.

You can see if you’re pre-qualified for an offer, which doesn’t impact your credit score. But if you decide to actually apply, it will lower your score temporarily. One thing to note is that it’s hard to get a first credit card if you have no credit history, so many people start off with a secured credit card, which lets you build credit after paying a refundable deposit equal to the credit line.