It's no surprise that you want to set up your youngster for success—and that making sure they have the know-how, resources and a strong financial foundation when they leave the nest. And while financial literacy education is offered in 27 states across the U.S. and required in 14 for high schoolers, there's still work to be done.1 A recent study by the Milken Institute reveals that many high schoolers lack basic money management skills and knowledge.2
This gap in financial education leaves them vulnerable to common money pitfalls: from accumulating high-interest debt to not saving enough for emergencies or retirement to not taking advantage of wealth growth opportunities.3
So how can you set up your children to thrive financially? For starters, the earlier you can teach your kids about money basics, the better. Whether they're little sprouts or teenagers, let's take a look at six simple ways to set up your child for financial success.
1. Fold in Money Lessons in Your Daily Lives
Recent research shows that lectures can only go so far: while it's important for parents to talk to their kids about money management and to be good financial role models, these lessons were most effective when parents provided experiential, hands-on learning opportunities.4
Whether it's learning to balance a budget to using credit responsibly, money management is a skill that takes time to build. So it's best to teach your kids age-appropriate lessons throughout their childhood.
But what are the money basics to focus on with your kids? According to the Consumer Finance Protection Bureau (CFPB), three main building blocks of financial capability are:5
- • Executive function: Planning ahead, practicing self-control, juggling multiple tasks and capabilities,
- • Financial habits and norms: The values, standards, routine practices and everyday rules deployed to navigate daily financial life.
- • Financial knowledge and decision-making skills: The knowledge and skills needed to understand the financial world and make informed financial decisions.
To help your child develop their money management chops, here are a few examples of putting principles into practice according to age group.
Young children (ages 3 to 5): Practice making choices at the grocery store
While preschoolers may be a tad too young to grasp some of the more abstract concepts about money, you can teach them the power of the dollar and how to make responsible choices on how they spend their money. For instance, you can explain how they need to make money decisions when at the store6:
- • Ask them whether that item from the candy aisle they toss into the shopping cart is a want or a need.
- • Give them a few dollars and let them pick which snack to buy.
- • Walk them through your own spending decisions. For example, why did you choose one brand, type and size of milk over the other? Go over factors you mulled over in making your choice, such as the cost, value and how much you think you might need in a given week.
- • When you get home, have them count the change and separate them based on the types of coins. Show them how much each coin is worth.
- • Explain that while some things do cost money, there are also things that are free.
School-age and preteen (ages 6-12): Set and save for a financial goal
The CFPB recommends that, at this age, kids should develop discipline around being frugal, saving and feeling in control of their money. 7 It's also a good age for them to learn how to plan ahead for big events and things they want, as well as manage their time and money to reach a big goal.
To help teach these lessons, gamify savings by breaking down the different steps and making it clear what the end goal is. Ask them to think about a goal they'd like to save for: a toy, video game, trip to the arcade, movie tickets—whatever! Then, talk about logistics: why is it important for them to plan now, and why is it important to save for that goal? Where will they stash their money? What trade-offs will they need to make it? To help them visualize reaching their goal, you could even create a chart to map their progress.
Teenagers: Learn to manage money with a budget
If financial literacy is taught in your child's high school, use it as an opportunity to tie it into what they are learning in the classroom: budgeting, saving, investing and debt management. 8
Sure, teenagers don't need to pay the rent or make sure the lights are kept on in the house, but show them the ropes for creating a budget. Start by helping them jot down a list of their expenses—such as spending money for clothes, gaming and eating out and their share of extracurriculars.
In helping your teen come up with a budget, consider showing them yours, and sharing some of your budgeting challenges. This could help your child understand that when it comes to money management, nobody has all the answers, nor is anyone perfect with their finances. Plus, being transparent about money lessons you've learned the hard way can teach your kids to be more open, too.
Another idea: consider a money management app designed for teens. This can help them keep tabs on their spending and saving, and encourage developing strong financial habits. Plus, some apps enable you to link accounts with your teens so that you can transfer funds, monitor their finances and incentivize saving. At this age, you can go deeper in the weeds with money management.
2. Set Up Money Jars
No matter what their age, place three jars in the bedroom—one labeled "saving," another labeled "spending," and the third labeled "giving." If your kid receives an allowance, birthday money from relatives or a paycheck from an after-school job, they can choose what portion of it goes toward each of the three jars.
Because many money concepts can feel abstract, it can be helpful to have physical items that are in clear view. It can also help your child learn the difference between wants versus needs, as well as how to automate savings and spending (i.e., putting the same amount in each jar each week and allocating a certain amount for specific types of purchases). It can, in a very tangible way, show that money is a finite resource, and can present hard choices. Plus, it's fun to watch that money pile up!
3. Encourage Them to Learn Entrepreneurship and Earn Money on Their Own
Whether it's selling lemonade, sweet treats, offering car washes or mowing lawns, beyond basic financial literacy, engaging in entrepreneurship or a part-time job can help teach your youngster creative thinking, problem-solving, resiliency and curiosity.9 Plus, studies show that teens' early employment experiences can lead to long-lasting career benefits, such as higher hourly wages, increased yearly earnings and less time spent out of work.10
Starting a side business (even if it is a lemonade stand in the driveway) can serve as a springboard for creativity and pique your child's curiosity. Support them in fully drumming up ideas for their venture and figure out a game plan on how to go about executing it. Help them understand what it means to enjoy a profit, and what they can do with the money earned. For instance, they can put it back into their business, or they can put it toward a goal.
4. Get Your Kids Into the Right Savings Vehicles
Making sure that your kids are using the right savings products is part of learning the money management basics. Here are a few accounts to consider that can help lay a solid financial foundation for your child.
Open a savings account for your kid
Opening a savings account for your child can help them learn to save for the future, manage their money and also practice delayed gratification. Plus, as they get to be a little older, it can help them learn what banks offer, which can be a gateway to discussions on credit, loans, investing and debt. Studies also show that kids with savings with $500 or less in their savings are three times more likely to attend college, and four times more likely to graduate.11
You'll need to open an account for your child and the minimum age requirement for them depends on the bank. Before you open an account, talk to them about what it means to be responsible with their money, which includes tracking what goes in and out. After they open an account, show them how they can use savings for major goals.
Open a custodial account
As a parent or guardian, one step you can take to set your children up for financial success is to open a custodial account. It's a type of savings account for kids that you control and manage for a minor. Depending on the state you live in and the type of custodial account, once your child turns anywhere from 18 to 25, the account closes and the funds are transferred over to them. This is money they can use toward starting their own business, paying for a trade school or higher education (although not required), or pursuing other hopes and dreams.
Save in a money market or certificate of deposit for your child
Socking away money in either a money market account or a certificate of deposit (CD) for your children can give them a boost when they become adults. Another idea: open a money market with the new addition of a child that you can use for child-related expenses. You'll be able to tap into funds whenever you like, plus earn interest.
The Bottom Line
Providing your children with strong financial footing requires a mix of teaching them money basics, such as through activities for kids and providing learning opportunities. It's a delicate dance that requires thoughtful planning and orchestration. But by taking some steps forward today, you'll make steady and fruitful progress—and your child will thank you for it.
Jackie Lam is an L.A.-based money writer whose work has appeared in Salon.com, Refinery29, CNET, Business Insider and BuzzFeed, among others.
LEARN MORE: View Vivid Crest Bank 's money market accounts and certificate of deposit (CD)options.
Sources
1. Ramsey Solutions (2022, August 2). Which States Require Financial Literacy in High School?
2. Contreras, O., & Bendix, J. (2021). Financial Literacy in the United States. Milken Institute.
3. Silver, C. (2022, August 21). The Push to Require Financial Literacy Education. Investopedia. Retrieved January 23, 2023, from https://www.investopedia.com/the-push-to-make-financial-literacy-into-law-4628372
4. LeBaron-Black, A. B., Curran, M. A., Hill, E. J., Toomey, R. B., Speirs, K. E., & Freeh, M. E. (2022). Talk is cheap: Parent financial socialization and emerging adult financial well-being. Family Relations.
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9. Sekula, S. (2022, August 24). From ABCs to CEOs: How these young entrepreneurs are making moves. USA Today.https://www.usatoday.com/story/money/business/smallbusiness/2022/08/24/kid-entrepreneurs-business/10280117002/
10. (2014). New Study Finds Teens' Early Work Experiences Have Long Lasting Career Benefits. Employment Policies Institute. https://epionline.org/release/new-study-finds-teens-early-work-experiences-have-long-lasting-career-benefits/
11. Elliott , W., III, Song, H. A., & Nam, I. (2013). Small-dollar children's saving accounts and children's college outcomes by income level. Children and Youth Services Review.