Teaching financial literacy to children and teens

Most Americans can’t pass a basic financial literacy test, according to the Finra Foundation. In fact, 66% of people surveyed couldn’t answer three out of five questions correctly.

Though more financial courses in public education could certainly help here (only a few states require students to take personal finance in school), parents and teachers can probably make the most immediate impact. Keep reading to find out how.

Teaching children financial literacy: How this guide can help

Do you want to teach your child the ins and outs of money management, help them establish good credit and encourage financial independence as they grow older? With lessons, resources and interactive games, apps and activities, this guide can help. Note: Each section in this guide is based on the Council of Economic Education’s standards for financial literacy.

Why teach your kids about credit and finances?

Teaching children the fundamentals of credit, finance and money management is crucial for their financial success and helps them develop essential mathematical and problem-solving skills. By adopting responsible financial practices as a child, the more likely they will have a good credit score when they’re older.

Kids and teens need a foundational knowledge of how money is earned, spent, allocated and, of course, borrowed – long before their finances call for it. This should enable them to easily apply for a credit card, student loan or mortgage down the line, as well as have the credit necessary to do so affordably. Additionally, giving children access to a credit card provides a new opportunity for parents to teach children about responsible spending and building credit.

Financial and credit literacy checklist for kids (grades 6-8)

Early middle school is a great time to start encouraging financial learning. Most children this age already have some experience making small purchases on their own, and they’re usually pretty familiar with seeing adults work, handle money and pay their bills.

Around this time, you’ll want to begin bridging the gap between classroom math and real-world economics: How can they use addition, subtraction, multiplication and division with their money and purchases?

You’ll also want to begin instilling a sense of responsibility in them regarding their finances, helping them understand the importance of financial goal-setting (saving up for a new bike, for instance), as well as the short-term and long-term payoffs of saving and budgeting. Knowledge of how money is made and how to make more of it is also very important at this stage.

Here are some concepts you’ll want to begin teaching, as well as the resources to help you do it:

Earning income (grades 6-8)

• Careers: Job options vary, with each one requiring different levels of education, training and skill sets. More training and education often equate to more career prospects, though they also require a bigger investment of time and money. It’s also important to emphasize at this age that circumstances and life choices can also impact job prospects.
• Entrepreneurship: You can create your own job opportunities and pave your own way. This comes with risks, though, and entrepreneurs should be prepared to take the bad with the good.
• Earnings: One can earn income in many ways. Aside from a traditional income-earning job, investments can also translate into income. Interest, dividends and capital gains are a few examples of these.
• Social Security: What is Social Security and how does the government program work? You can often relate these lessons by tying in a grandparent or other loved one who gets Social Security payments.

Buying goods and services (grades 6-8)

• The marketplace: There are many places to shop for and buy goods. Not all sources are created equally, nor are they all trustworthy. Understanding a source’s motives can be a good way to gauge its authenticity and trustworthiness, and ultimately, make the smartest purchasing decision.
• Payment methods: Teach your children that you can pay for purchases in many ways: cash, check, credit/debit card, and electronic payment. A good understanding of all of these, as well as their best use cases, is crucial in today’s economy.
• Budgeting: Budgeting is vital to making the best use of your money and achieving your financial goals. A budget should include your income, savings, taxes and expenses – both fixed and ever-changing. You can (and should) revise budgets as your finances change.

Saving (grades 6-8)

• Banking: You can safeguard your money by putting it into a banking account with a bank, credit union or other financial institution. You may be able to earn money on your savings with an interest-earning account.
• Where interest comes from: Banks often loan money to borrowers who need it. They get a fee in return for this loan, called interest. They use these fees to pay savings account holders for entrusting the bank with their money.
• How interest works: Interest rates are dependent on the larger market. You earn interest on both your principal balance (what you put into the account), as well as on the interest you earn (this is called compound interest). The more money you have in your savings account, the more you can earn in interest.

Using credit (grades 6-8)

• Loans: Loans allow you to use someone else’s money to pay for something, like a home or a car. Loans vary in amount and pay-off length depending on where you get them. The cost of borrowing this money is called interest.
• Credit cards: Credit cards are a form of a loan. They give you access to funds – up to a certain amount – from the financial institution that issued the card. Credit card rates are generally higher than on other loan products, so they will cost you more in interest. There are also extra fees if you forget to pay your bill or pay late.
• Interest rates: Interest rates can vary greatly and fluctuate often due to the market. Your credit score, credit history and overall risk all play a role in interest rates. The less likely a person is to repay the money, the higher their interest rate will be and the more the loan will cost them.
• Financing: You can borrow money to pay for virtually anything, from a car or house to your college education or career training courses. You just have to pay the money back over time.

Financial investing (grades 6-8)

• Financial assets: Financial assets are anything that has monetary value. They can include bank accounts, bonds or stocks, or tangible items like a home or car. Retirement accounts and funds are also considered assets.
• Interest: You can earn interest on financial assets such as bank accounts, government bonds and retirement funds. You’ll also pay interest if you take out a loan.
• Stocks and capital gains: Stocks are small pieces of a business that you can purchase. When the business makes money, stockholders make money on their investments. This is called a capital gain. When the business loses money, stockholders do as well.
• Pricing: Prices of financial assets and real estate are determined by the market. When an asset is in high demand, its price is higher. When demand is low, the price is lower.
• Financial risks: There is always a risk when investing in a financial asset or piece of real estate. Riskier investments offer a higher rate of return, meaning the chance to earn more money. They also have a higher rate of loss, which could mean you lose your investment altogether.

Protecting and insuring (grades 6-8)

• Personal financial risk: Your money is at risk when unexpected events occur regarding your health, home, job, income or other major areas of life. These events will cost you money to address and may require changing your budget and adjusting your finances.
• Insurance: Insurance is a way to protect yourself from these financial losses. The insurance company will collect a small fee every month or year, and in exchange, will help you pay for the costs of unexpected financial events if they occur.
• Premiums: Premiums are the fees you pay to an insurance company. They’re determined by the risk you present (how likely you are to have an unexpected health, real estate, automobile or other detrimental life event). Premiums are often paid on a monthly or yearly basis.
• Options: You can choose your insurance coverage based on your needs. If you have a high chance of having an unexpected event, you may want more coverage to help with the costs. If you have a low risk, you might choose less insurance and a lower premium.

Financial and credit literacy checklist for teens (Grades 9-12)

At this age, teens are leaving the theoretical behind for the real world. They’re learning about college costs and student loans, they’re budgeting to save for cars or higher education and they’re working for their money after school, on the weekends and in the summer. Finances have become a top-of-mind concern in their lives and they’re eager to learn more and make better financial decisions.

Most importantly, these kids are closer to leaving the nest than in our last section, making financial and credit literacy even more vital to their success. Upon graduation (or possibly before), they’ll be applying for loans, establishing credit and making important decisions about their career paths. A strong financial foundation can help them make smart decisions when it really matters.

Here are the concepts you’ll want to drive home:

Earning income (grades 9-12)

• Career evaluation: People choose their jobs based on a number of factors, including income, health benefits, skills, job requirements, location and more. Some people may choose to attend college or seek higher education to further their career prospects, while others may choose to enter the workforce and start earning right away. It’s important to weigh the long-term benefits and costs of any career path you consider.
• Taxes: As citizens, we are required to pay taxes on the money we make, the property we own and our purchases. These funds go toward government services like schools, Congress, road improvements, etc. Your exact taxes will vary depending on your job and how you earn money. It’s important to adjust for estimated taxes when budgeting.

Buying goods and services (grades 9-12)

• Buying habits: Price plays a big role in a person’s buying habits. People usually consider a product’s price, their income and the price of alternative products when deciding what to buy. You might also consider factoring in things like quality, maintenance requirements and other things that could cost money over time.
• Smart shopping: You may incur costs when searching for information on goods and services, such as subscription fees, membership dues or even the cost to browse the internet on your phone. It’s important to weigh the cost versus the potential benefits of the information.
• Protections: The government has laws in place to protect consumers from fraud and dishonest business practices. You can also use resources like the Better Business Bureau to make sure you purchase from reputable and well-rated businesses.

Saving (grades 9-12)

• Spending versus saving: You can either save or spend funds. You have to consider your future goals, immediate needs and other financial factors to determine the right choice for you.
• Inflation: When the prices of goods rise, the purchasing power of the dollar declines. This is called inflation and it can cause the value of your money – including that in savings and investments – to decrease. To factor in inflation when choosing a savings account, look at the real interest rate, which is adjusted for the current rate of inflation. The real interest rate more accurately reflects how much your purchasing power could grow with the account.
• Government role: Government policies can have an impact on whether people want to save, invest in bonds or make other investments.

Using credit (grades 9-12)

• Costs of credit: Borrowing money comes with many fees. There are typically charges for opening the account, late fees for missed payments, as well as interest rates and APRs to consider. APRs reflect the total annual cost of borrowing the money.
• Competition: Banks and financial institutions often compete for your business when you need to borrow money. They might offer you different terms and rates as a result. They also might require collateral (a piece of property they can use to pay back the loan if you default).
• Mortgages: Mortgages are loans we use to purchase real estate. Most people use them to purchase their home, which they then pay back over time. Mortgages require you to pay interest, just like other loans.
• Down payments: Down payments are large sums of money you put toward home or real estate purchases. They give you an ownership stake in the property and make you less of a risk to the mortgage lender.
• Credit decisions: When a bank or lender loans you money, they take many factors into account when determining how much to offer and at what interest rate. They’ll consider things like your credit history, your credit score and any debts you have. Your credit score reflects your risk as a borrower, and the higher it is, the less risky you are. Borrowers with higher scores generally have access to bigger loans and lower interest rates.
• Debts: If you borrow too much money and are unable to pay it back, there are options. You can declare bankruptcy, which wipes your financial slate clean but negatively impacts your credit for many years. If you own a home, the lender may also foreclose on your property (take it away) to get their money back.
• Legal protections: There are laws in place to protect you when using credit and borrowed funds. Credit card companies and lenders must fully disclose all the terms of your loan to you upfront and they cannot use discriminatory policies or marketing practices.

Financial investing (grades 9-12)

• Taxes: Federal, state and local taxes vary on different types of investments. This can affect the rate of return on certain investments.
• How financial markets adjust: Financial investments can adjust when there is news about a company or industry’s future profitability.
• Diversification and short-term investments: Shorter-term investments will have lower rates of return than long-term. It’s important to diversify and invest in different types of financial assets to lower your investment risk.

Protecting and insuring (grades 9-12)

• Types of insurance: There are many types of insurance you can use to protect yourself from unexpected costs and hazards. Health insurance covers costs of illnesses and preventive care, property or renters insurance covers your home and belongings within it and life insurance helps protect your loved ones after death. There is also disability insurance that will provide income if you’re hurt and unable to work.
• Probability: Probability – or the likelihood that an event will occur – is what determines a person’s insurance costs. It’s also what you should consider when determining what types of insurance (and how much of it) you’ll need.
• Cost-sharing: Insurance policies often have cost-sharing features, like copays and deductibles, that allow you to split expenses with your insurer. This encourages you to reduce your chances of potential loss (like eating healthier, for example) and helps lower your premium.
• Identify theft: It’s important to take steps to protect yourself from identity theft, which could harm your credit and future financial prospects. Keep a close guard on your personal information and don’t share financial details freely. If you are a victim of identity theft, alert the proper authorities and take steps to repair your credit.

Bottom line

Encouraging children to learn financial lessons now can pay huge dividends later – no matter what age they might be. Use these resources and lessons to guide your child’s financial education and give them the foundation they need to build strong credit, achieve their goals and enjoy ample financial opportunities as adults.