A Recipe for Youth Financial Literacy

Imagine someone handed you a chef's hat and apron and dropped you into a trendy restaurant, directing you to "fuse elements of French and Thai cuisine." Problem is, you've only watched cooking shows and, at best, you've sliced the occasional carrot to help your dad with a stew.

This is essentially the state of financial literacy today. Folks aren't being taught the skills necessary to become financially literate. They are tossed a hat and an apron and are expected to just figure it out. This is a recipe for disaster. Financial Literacy, like becoming a top chef, can only be achieved by developing skills over a period of time...a long time.

So much effort is directed at our young adults in an effort to fix poor habits. The people involved in those efforts are doing amazing work, but imagine if more or most of those amazing efforts were focused where they really need to be: building good financial habits in our younger kids.

There's a dichotomy in place regarding youth financial literacy. People almost always agree that my passion for teaching young kids about the value of money is the direction we need to head, yet most decide not to take this road. Parents delay teaching — or even talking about money — until their kids get older, and financial educators most often focus their efforts on teens and young adults. So why should we teach kids, even preschoolers, about the value of money? Because kids can understand a lot more than you think BEFORE they reach kindergarten. The PTA (Parent Teachers Association), NCEE (National Council for Economic Education) and CUNA (Credit Union National Association) all agree. In fact, CUNA has an entire set of resources (Thrive by Five) dedicated to helping parents teach their preschool kids about money.

I'm constantly trying to think of ways to get my message across. After reading Julie Rains' post on basic financial planning, it dawned on me that it would be revealing to match up the key components of a solid ADULT financial plan with the key aspects of youth financial literacy. Not surprisingly, it turns out that the basics of an adult plan include behaviors that kids can learn at a young age. I pulled just a few relevant topics from Julie's post and noted how kids can begin to learn these skills through a basic program that can be started in or just before Kindergarten.

1. Pay yourself first!

By giving kids an allowance by the time they are five and mandating that they save at least a portion of that money, they can help build this most basic skill. My personal experience suggests that somewhere between four and five is a good time to start an allowance, depending on the maturity of the child. We use a three-jar system to allow them to Save, Share (charitable donations) and Spend Smart. (Note that we don't just label the jar "Spend," but rather we wanted it to be about more than just spending. We wanted our daughters to eventually become smart consumers.)

2. Save for your retirement (matching).

We use the Allowance Magic program (full disclosure, I sell the book on my site) and the system incentivizes saving by allowing parents to "match" some percentage of allowance saved. For example, when our daughters put a dollar in their Save jars, they get an additional quarter. How much you match is your choice. By the way, the book is short but detailed enough to get you all the way into the teenage years.

3. Live within or beneath your means.

By embracing financial literacy and teaching it to their kids, parents can realize their own deficiencies and make adjustments. A great by-product of starting a program with our kids has been to improve my own thinking about needs vs. wants, making smart spending choices, and paying myself first.

4. Save for major purchases.

Goals, goals, goals! If your child really wants something, have him/her draw a picture of the item (or print it from a website), write how much money it will cost, and paste that on his/her Save jar. You can even go a step further and note how many weeks of allowance it will take to achieve the goal. Using goals to teach savings makes it tangible, and learning about goal setting is important for later achievement.

5. Give money to charity.

It's a good idea to mandate that a portion of the weekly allowance be plopped into the Share, or charitable giving, jar. Then look for opportunities to give this money away that's tangible for them. For example, our school collected money for Haiti relief, and our daughter was able to empty her Share jar into to collection jar. The more tangible the application, the better.

I am hopeful that this will help convince a few more parents that teaching very young kids these basic tenants can help ingrain these habits early, so that they (or others) won't have to break bad habits later.

Let's give our future chefs more than just a big hat and an apron!

John Lanza created the award-winning DVD, "The Money Mammals: Saving Money Is Fun," and penned the new children's picture book, Joe the Monkey Saves for a Goal. Both are available at www.themoneymammals.com. John lives in Los Angeles with his wife and two daughters. Read more by John at his blog, Kids and Money:

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Guest's picture

OMG what a great article! My friend Charlene Drake sent me the link for this today because she saw my blog post on the same subject, a minor passion of mine: http://www.waterwatereverywhere.net/2010/05/top-ten-ways-to-teach-your-k...

John Lanza's picture

Thanks for the link to your post and thanks for helping to shine a light on this important subject. I thought #10 in your top ten was a great point - letting kids see how lucky and/or blessed they are by exposing them to true difficulty - people in poverty.

Guest's picture

John as always you have great information to share! YES! YES! YES! Just imagine "if more or most of those amazing efforts were focused where they really need to be: building good financial habits in our younger kids." Imagine what could happen to those CASH SAVVY Smart kids! They could make a positive difference in the world!!!

Keep up the great work and thank you for introducing me to this awesome site!

Sarah Cook
Founder and CEO, http://RaisingCEOKids.com

John Lanza's picture

Thanks for taking a look, Sarah. I knew WiseBread would be right up your alley. Keep up the good work with RaisingCEOKids.

Guest's picture

good post,thank you for share

Guest's picture
MamaDish

Thank you for sharing your insight. I hope to instill this wisdom on my 3 young children so they grow up to have a healthy relationship with money. I regret that I did not have this understanding in my youth, and suffered great consequences as a young adult. Keep up the great work!

John Lanza's picture

Good luck with your three kids. Teaching them good money habits early will pay off and I think you'll find that you have to break less bad habits later. I hope that you'll create an allowance program (if you haven't already) and stick with it.

Guest's picture

John, these are really great steps. I actually wrote about paying yourself first a while back. I tried to provide specific action items to help people get over that initial inertia and set up a savings account. You can check that out here.

http://aceofwealth.com/2010/02/pay-yourself-first/

This is a really great post!

John Lanza's picture

Thanks for including your post. I left a comment on your site, too - parents can model paying yourself first to better instill the behavior in their kids.

Guest's picture
kt

I am also for educating yourself about financial matters because there is only so much that formal education will teach you about finance and investing and the bloodthirsty nature of stockbrokers. i have never really believed in the pay yourself first maxim even though it seems practical and workable

Guest's picture

This is a good article, but I really think that giving and allowance to a 5 year old child is a bit too early.

If anyone is interested in having their children participate in a program about money management, Junior Achievement has a very good one called "Dollars and Sense", which is oriented towards Grades 7 and 8. I taught this course (it's a 6 hour all day course) as a volunteer from the financial community (in Toronto, Canada).

John Lanza's picture

Junior Achievement is awesome (I'm a volunteer alum too, although I did their 1st and 2nd grade programs) and I'm glad you're out their volunteering to help kids learn about money management.

I also understand that you might think an allowance for a 5-year-old is too early, but I think it's important for kids to start making money decisions when they are young. I also know from experience what they can learn. You should also consider that kids are being targeted by advertising to spend, spend, spend by the time they are two. Talking to them about money and giving them an allowance is a great way to balance the message and get them thinking not only about spending, but also sharing (charitable giving) and saving.

Here are just a few benefits:

-They can learn to save for a goal (goal-setting, monetary or not is a terrific life lesson to learn) and I know this works because it did for my 5-year-old.
-Through goal-setting, they can learn about delayed gratification. The famous Mischel "marshmallow study" noted that kids who understood delayed gratification at age four performed better on standardized tests and were better adjusted as teenagers.
-They learn to make choices with their money - to share, to save, to spend smart.
-They can learn mathematical concepts
-They learn to be comfortable with money - Money has been a taboo subject for a long time and by starting the money conversation and giving kids and allowance to allow them to control their own money to some extent will help parents and kids open a dialogue.

I'm sure I've missed some other great benefits and I hope some others will chime in.

The PTA, Credit Union National Association and National Endowment for Financial Education (among other institutions) all promote teaching kids about money even before they reach kindergarten and an allowance is just a part of that process.

Let me know what you think.

Guest's picture

Great post. I like your four simple steps and the idea of parents starting this idea before they begin kindergarten. As a 3rd grade teacher, many of my students have difficulty counting coins, and don't really understand the concept of saving money. We dedicate a whole reading unit about money, how it started (bartering), why it's important to save it, and how to earn it. It makes my job a little easier when they have some foundation of knowledge.

John Lanza's picture

I'm glad to hear it and I hope this doesn't come across as a parent bragging about his kid, but starting allowance early and talking about money on an ongoing basis has helped her really understand money denominations. She's an expert money counter. She just completed saving for a $104 goal (an American Girl doll - with tax) and it was a great exercise to have her break up the money into bags of nickels, dimes, quarters and dollars as she counted the total she needed. I also have to say that the folks at the counter were incredibly patient with the complex transaction. I wasn't expecting that.

Guest's picture
Wil

I couldn't agree more. Even though I focus on those a little older (like working age), the earlier the better when it comes to teaching financial literacy.

Guest's picture
liz hirst

Couldn't agree more! And in keeping with your restaurant theme...we have a program called "What's on the Menu...Financial Education for Families", sponsored by Volunteer USA Foundation and the SunTrust Foundation. The entertaining and educational pilot program is taking place in Florida schools...to nurture children and parents to be more financially-savvy and better prepared to manage money in the future. Check out the family friendly materials at www.volunteerusafoundation.org

Guest's picture
Guest

Liz, thanks for info I will definitely check it out.

John Lanza's picture

Wow! This program looks incredible. I just tweeted about it, https://twitter.com/johnlanza.

Guest's picture

Handling money seemed to be a very difficult task that often leads to a headache. I think everyone will agree that it is the most inconvenient thing to manage.Well, practically dealing with money expenditure may sounds convincing but the truth is there are really no easy way to be dealing with money. Though I agree that proper education will at least gives us the benefit of being financially knowledgeable and will provide better ability on money making decision, I think the only means of preparing a child to be more responsive in dealing with money is to let him experience a financial starvation for this will bring out the best effort in him to value money effectively.

Guest's picture

Handling money seemed to be a very difficult task that often leads to a headache. I think everyone will agree that it is the most inconvenient thing to manage.Well, practically dealing with money expenditure may sounds convincing but the truth is there are really no easy way to be dealing with money. Though I agree that proper education will at least gives us the benefit of being financially knowledgeable and will provide better ability on money making decision, I think the only means of preparing a child to be more responsive in dealing with money is to let him experience a financial starvation for this will bring out the best effort in him to value money effectively.

Guest's picture

Those are all great tips for our younger generation to remember when taking responsibility of their own financial life. Something we would add to the list is “monitor your credit.” It is important to know your financial standing and history of your spending habits. Credit monitoring of all 3 Credit Reports helps you catch problems early which could save you a lot of financial stress and hours of aggravation. When you are a member and a key change is reported, freecreditscore.com will send you an email or text alert. Just one way our product helps keep you mindful of your financial health. For more information feel free to connect with us on our social media sites at www.facebook.com/freecreditscore.com and Twitter @FCSdotcom.

Guest's picture

Great article John. Love the focus on getting kids started early on these habits through tangible, consistent practice.

A commenter mentioned that 5 might be too early for an allowance. I think that varies with the child and the family - do what you're comfortable with. In our case, we waited about a year longer to start an allowance with our youngest. Nonetheless, we still employed the techniques that John discusses prior to setting up a regular allowance. We just did it with the spare change he collected in sofas and under car seats as well as the occasional Birthday check.

Whatever you do, put a consistent system in place whether its physical or online. Practice makes perfect (or at least less imperfect)!