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September 6, 2021 8 min read

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Before I delve into the daunting topic of financial literacy for children, let’s begin by mentioning an unnerving fact here. Would you believe it if I tell you that more than 75% of the young adults in the US, aged between 18-24, are accumulating debt by spending more every month than they earn? Due to that very reason, they are relying on credit cards every month to make ends meet. Also, since they are lacking credit history, they are paying higher and higher interests on the resulting debt.

Noticing a self-created trap here? A quicksand in which they are stuck? Sounds frightening, right? Would you ever want your child to get into a tangle of debts soon after he steps into the real world? Of course, you wouldn’t. That’s where the importance of good financial literacy for children comes into play.

What is financial literacy for children?

To put it simply, the skills and the knowledge that our children should have to make efficient decisions while managing their finances make up their financial literacy.

Educating your kids from the start about spending money the right way is as essential as teaching good manners and habits. Financial literacy leads to savings for specific goals and spending only on what’s necessary and what you can afford. It will ultimately play a key role in making them lead a happier and more financially stable lifestyle. Each child will eventually turn 18 years old and be issued a credit score, yet many of them will not know how that score is calculated, or what steps to take to maximize that number.

Related: How to Teach Kids Financial Literacy in an Ever-Changing World

Why does financial literacy matter for children in the United States?

A few survey results showed me that financial literacy is lacking in most of the schools in the US.

Sadly, only 21 states required a high school course in personal finance education. Who’s going to give the children a real-world experience then? If it’s not the school, it has to be the parents.

Even the Consumer Financial Protection Bureau (CFPB) says that young Americans are not ready to manage their finances when they reach adulthood.

And now that people have started recognizing its importance, more than 85% of Americans believe that K-12 schools should make financial education mandatory because children aren’t receiving the information they need to be financially successful after high school.

Frankly, without it, I’m afraid to even Jeff Bezos would hardly stand a chance to maintain, let alone increase his wealth. Financial education is a process that continues right from childhood into adulthood.

Our children need to be taught that individual economic assessment and education matter today because:

  • The choices and options are forever expanding.
  • The world is moving towards comfort and luxury.
  • They shouldn’t rely on others for financial help.
  • Money is needed to live life the way they want to.
  • It’s generally not easy to overcome the wrong financial decisions.
  • There is a stark difference between needs and wants.

If you will not teach your children about managing money right now, how would you expect them to manage their finances flawlessly when they become adults?

In cases of negligence or even ignorance, the results are devastating, as I had mentioned earlier — a swamp of debts and stress engulfing the mental, physical and financial wellbeing of your children for the rest of their lives.

Financial illiteracy breeds irresponsibility and recklessness

According to a survey, nearly half of the adults in the US have monthly expenses beyond their means. And the average student loan debt per individual is more than $37,000 that isn’t being returned.

Why do you think that is?

That’s because children who have never been educated about finances properly in their childhood end up being bad investors with poor credit scores in their adulthood. Their reckless and irresponsible financial decisions lead them into trouble.

Teaching the children from a young age about the implications of bad financial choices and skills related to financial matters helps them make informed and practically viable decisions later on. They’ll also be able to manage and pay back their student loans efficiently if required.

Economic literacy helps avoid fishy financial activities

Children are so prone to making mistakes at a young age. If they don’t have enough knowledge about spending wisely, they may be caught up in bad financial activities to make easy money.

Teaching the youth to operate financially by leveraging credit to grow, and not a means of survival could potentially change their entire life.

Financial literacy helps understand student loans and debt

Another fact to show the importance of financial literacy for children in the US. More than 50% of all the students in the USA have to secure student loans and go into debt to get through college. As I had mentioned earlier in this article, the average student loan debt crossed $37,000 in 2020.

A well-informed child will know that he’ll be going to college sooner or later and obtaining a degree will require a financial sacrifice. They will develop a habit of savings and cutting down unnecessary expenditures from a young age.

This education and knowledge will be crucial to help them sustain college loans when they grow up and manage their finances successfully.

Related: Financial Education Is a Must For The Youth Today

Benefits of financial literacy for children

If you think it’s some kind of a bandwagon, don’t jump on it yet, know about the benefits first.

When you teach your kid about financial literacy, you are simply ensuring that they are equipped with sound knowledge and higher confidence about living in a better way independently.

  1. Learning patience and setting an aim

At a young age, children get excited when you help them start saving a few cents now and then. If you make them focus on a particular goal, like getting them something they’d like to buy (a toy, book, or anything at all), they will know how to set an aim and start saving. This will also teach them the importance of patience and how to save more.

  1. Setting up better financial habits

Children nearing adolescence start developing habits. They see their parents and they adopt the values. Letting them know about financial literacy at that age will help them shape their earning, saving and shopping habits.

They will know the basic difference between needs and wants. They will start understanding the limits of spending and managing money.

  1. Managing tough financial situations

Once the children reach adulthood, they will be mentally prepared to handle troublesome economic situations, like managing their student loans cost-effectively and efficiently when they reach college.

With the help of your teachings, they will have already developed the concept of how the world’s financial system works and realized the importance of financial literacy.

Ways to convey financial literacy to children

Now that you know why financial literacy is so important for your child, here are a few tips to help you break the ice and get comfortable with them to teach them more about it.

1. Start early and start small

Set goals for children at a very young age. Fix an allowance and teach them to ‘save’ and ‘spend’ under your supervision. Such tangible goals will invoke a feeling of interest in them, ultimately making them want to understand how money works.

2. Include their opinion in financial decisions

Children learn more from what you do than what you say. So help them gain some confidence in financial matters by making them understand the budgeting of your house. How much you earn, how and where to spend, and how to save, will help them understand the spending plans.

Ask them about their opinions and suggestions in financial decisions. That will bolster their confidence to take such decisions themselves in the future.

Related: 5 Simple Games To Give Kids An Excellent Financial Education From Home

3. Educate about earning and investing

For older kids, you need to take it up a notch. Tell them about ways to earn money and how to increase the income by investing the savings. Teach them about the chances of losing the investment money, what to avoid and how to make good investment decisions.

Tell them about your own financial experiences and their implications. By teaching young adults about credit we can change their financial future and set them up for success in life.

In today’s world, lack of financial stability brings misery and stress and degrades the standard of living. That’s where financial literacy at an early age plays its part in helping the children make less costly mistakes in their adulthood.

The importance of financial literacy for children in the US is even more. Low levels of financial literacy can hold back their chances for success and can lead to problems with their finances later in their lives.

It’s important to teach children about money, but it doesn’t need to be complicated or scary. With the right financial literacy skills themselves, parents can teach their children how to manage each part of their financial lives — including their budget and savings — so they grow into healthy, confident and successful adults.