Financial Literacy for Kids: How to Teach Kids About Money

More Than Calculating Costs At The Shops: Financial Literacy For Kids

Amy Thompson, author of Financial Literacy for Kids: How to Teach Kids About Money
Amy Thompson is the creator and owner of the blog Living Free With Amy T. As a former teacher who loves to help people get their finances in order and simplify their lives (the passion behind her blog), she is the perfect person to teach us how to develop financial literacy for kids.

Originally from the Chicagoland area, she now lives in northern Wisconsin with her husband and their beautiful new baby boy.

My hope is that by having Amy share with us how to teach our kids about money, they might end up more financially savvy than some of the adults I know… (Yes, I might be talking about me.)

Teaching Our Children Now To Be Financially Savvy Adults Later

It’s very common that many people don’t know how to manage their finances by the time they leave high school.

Because of this, they end up getting themselves into financial trouble early on. Then they have to dig their way out of it.

If you’re like most people, you’ll know what I’m talking about from first hand experience.

Just a little more financial education early on can significantly help prevent financial trouble later in life.

Financial literacy for kids doesn’t have to be a difficult topic.

Here are seven tips to help your kids learn good money habits. By starting from an early age they’ll be on their way to being good money managers when they are adults!

Explain Where Money Comes From

Kids often think that their parents have an endless supply of money. And that totally makes sense!

Their parents have provided for them for their entire lives. You’ve always ensured they have food to eat, clothing to wear, and a roof over their heads.

Why wouldn’t they think money grows on trees?

It’s essential to sit down with your kids and explain to them that there isn’t an endless supply of money. And that it can be spent quicker than it comes in. Ideally, in age appropriate terms at various ages from toddler to teen (and beyond).

Explain to your kids that the reason you have money is that you work hard for it. You provide a service or skill and are paid in return for that service or skill.

When kids begin to understand this, they can start to appreciate a little more just how valuable money actually is.

This is an essential step in developing financial literacy for kids.

Develop Financial Literacy – Spending Cash Is Better Than Debit

It is your job to teach your child how the world works.. and money is a big part of it. It is never too early to start. Although your babies might start out playing with toy coins and plastic piggy banks, as depicted in this photo, they'll soon grow up, and require skills to succeed in life. Financial literacy for kids is an important skill necessary to prepare them to successfully manage their money as adults.
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When kids start learning at an early age to actually have the cash to pay for something, they will more likely continue that habit into adulthood.

Those who didn’t save the cash for purchases or who had everything bought for them as children won’t have the same level of financial literacy – for kids, this concept is a long-term lesson best started when they’re young. (But still important enough to begin even if they’re already older.)

Of course, you are going to sometimes want to buy your children things they ask for. I am certainly not advocating that they pay for everything themselves!

But occasionally, teaching your kids to save money on their own for something extra can be a great way to teach them the value of money.

Kids can save money in many different formats: a piggy bank, mason jars, or even using envelopes. (For simplicity purpose, we’ll just assume they will use envelopes.)

Spending the money directly from a bank account requires a different level of cognitive development and awareness. If you go that route it’ll take much longer for children to understand.

When developing financial literacy for kids, cash is by far the better choice.

Now on to the envelope system.

The Envelope System

Dave Ramsey made the envelope system very popular and strongly suggests adults use it by putting budgeted cash into different categorized envelopes.

For example, if you budget $200 for groceries, then $200 in cash should go into your “grocery” envelope.

That is the only money you will use for groceries for the entire month. Once that cash is gone, no more money can be spent until the budget starts over the following month.

This helps adults avoid going over their budget and helps restrict them from using credit cards frivolously.

How To Use The Envelope System With Kids

Financial literacy for kids is essentially the same as for adults, and so the same techniques can be used when tailored to their abilities.

Kids can also use the envelope method for when they want to buy something.

If your child wants to buy a video game, for instance, then they can put cash into their “video game” envelope every time they earn or receive cash.

Kids should have enough envelopes for each item they are saving for.

For example, if they want the latest gadget every kid in school has right now, they should have an envelope for that. If your child also wants new clothes, then they should have an envelope for that.

You can set the limits on how many things you think they should be saving for at a time.

Every time they earn money, they can choose how much they want to put into each envelope. Once they have enough cash, they can purchase the item.

This helps kids learn to both save and budget their money.

Make sure that each envelope is clearly labelled and in a place that is visible for them to see every day to maintain motivation.

This is a great way to teach kids to save money to buy what they want and to understand that once the money is spent, it’s gone.

Teach Kids to Save

Though small was your allowance, you saved a little store: and those who save a little shall get a plenty more. ~William Thackeray. Providing an allowance and opportunity to earn money will enable your children to learn important money skills, like saving their coins (as the boy in the photo is doing). Find out how to teach your children about money.
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When kids receive money, whether it’s from gifts or by working for it, it is important that they learn to save some of it right away. (FYI – this is also important for adults!)

This is called “paying yourself first” and the point of this is to have cash in the bank.

For adults, you might be saving to build up an emergency fund, or adding to an investment account. For kids, it’s more just about learning the practice of saving.

This is different than the envelopes because this is money that does not get touched again (until far down the road).

Sit down with your kids and discuss with them how much of what they receive is going to go into the bank before it is spent.
A good rule of thumb is often 10%. But you can decide with your kids to go up or down from there.

When your kids receive money, take them to the bank right away and have them hand over the cash (or cheque) to the bank teller and let them be able to feel the money leaving their hands.

This step is so important.

If you take the money to the bank for them, it won’t be as real. So make sure they are with you.

This is also a good time to teach them how to fill out a deposit slip!

Provide Opportunities To Earn Money

As previously mentioned, it is so important for kids to understand that it takes hard work to earn money.

Although they should receive monetary gifts and be grateful for them (just like any adult), kids should also have an opportunity to work to earn cash.

Decide on some chores they can do around the house in order to earn money. These should be above and beyond the chores you expect each family member to complete simply because they are a part of the family.

Depending on their age, you may want to discuss with them together or decide on a few for them.

Determine how much each chore will be worth and give them a pay date.

Be consistent with that pay date and only honour chores that were completed. You can even create a pay stub!

It can be easier to remember, not only by adding the pay date to your calendar but also work it into your morning routine. If your mornings are busy, consider adding to your evening routine instead.

This is a great way to teach kids a good work ethic, discipline, and what it takes to earn money.

If your kids are old enough, they can also look for other ways to earn cash such as mowing neighbours’ lawns, shovelling driveways, or even selling their crafts to friends and family.

Teach Them Generosity Through Giving

it is critical that kids start to learn the value of money, short term and long term saving and budgeting at an early age. ~Alexa Von Tobel You might think the toddler in this pic is too young to understand the plastic coins and piggy bank she's playing with mean anything beyond fun play, but with age appropriate opportunities, young children develop financial literacy which will carry through to their adult years.
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Giving is such a great way for kids to learn generosity.

It helps them understand that what they earn can be shared to better help others and that money isn’t everything.

They also learn that they can give money away to those less fortunate while still having some leftover for themselves.

Help them come up with a list of things they think are important, and then help them look for a reputable charity that fits within their priorities.

Depending on what’s important to them, you could even go a step further than financial support by creating a kid’s group for them to work as part of a team to give back to their charities of choice.

Teaching kids how to give early on will help them become adults that love to help other people and appreciate money more rather than just expect it.

This appreciation will help them want to better manage their money.

Teach Kids To Use A Chequebook Register

A lot of people laugh at me for this one, but I used to work at a bank, so I’ve seen the importance of using a chequebook register. I saw first hand how not keeping track of their finances got people into a lot of trouble.

So many of us think that we can keep track of our finances just by looking. Logging into our bank account online and looking at the statement, for instance. And while there is some validity to that, it certainly should not be the only method we use.

There are automatic payments to consider, fraudulent transactions, merchant errors, and many other things that can get us into trouble if we always trust what we see in the bank when we log in.

Obviously, your kids are not going to have a whole lot of transactions coming in and going out of their bank account as you do.

But getting them started with this habit early on, helping them understand how to do it, and explaining why it’s important will help prepare them for when they do have a lot of bank activity later in life.

You don’t have to use an actual chequebook register. That could be a little complicated depending on the age of your kids.

You can use a spreadsheet, a blank piece of paper, a notebook, or something else you think would work well.

If your kids are old enough, try a chequebook register app. That’s what I do and love it!

Whatever you choose to use, make sure your kids use it, as age appropriate, so they know exactly what is in their bank account at all times.

Final thoughts

It's never too early to teach your children about the tool of money. Teach them how to work for it and they learn pride and self-respect. Teach them how to save it and they learn security and self-worth. Teach them how to be generous with it and they learn love. ~Judith Jamison. Give your kids the gift of financial literacy and they'll feel like a superhero, like the girl in this pic, standing in front of a brick wall, looking upward to the sky, knowing they'll be able to manage once they're out on their own.
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By teaching your kids these seven steps, they will be well on their way to having good money habits once they leave high school.

That alone puts them a step ahead of so many others.

Unfortunately, there are so many adults that don’t know how to manage their money well and often it just comes down to a lack of financial education.

Learning good money habits and financial literacy for kids starts in the home.

Make sure your kids begin these important habits early on and they will have much more success as adults!

If you want a detailed course to guide you to raising financially literate children, check out Family Money School. It provides lessons to walk you through how to teach your children about all aspects of money management. Lessons use real life and engaging activities to keep your children focussed and to maximize learning.

What financial skills do you wish you’d known after going out into the world as an adult? Where you well prepared, or like most of us who didn’t have enough knowledge? Let me know in the comments how you develop financial literacy for kids in your own home.
How to Teach Children about money, and why you need to: Like this boy, your children will be satisfied with putting their coins in their piggy banks once you start teaching them about money. Read the tips to see how you can start developing good money habits in your children now.

How to Teach Kids About Money: and why you need to. Have your kids happily saving and spending their money wisely, like the girl in this pic. Follow these easy tips to ensure they have the money skills they need to go out successfully into the world after high school.

7 thoughts on “Financial Literacy for Kids: How to Teach Kids About Money”

  1. You’ve raised an excellent topic and I couldn’t agree with you more! You’re right by saying that many adults are struggling with managing their personal finances and therefore rob themselves of many opportunities in life (e.g. travel). I would even go as far as saying that although teaching kids about money is essential, it shouldn’t stop there. Teenagers should also learn more about personal finances, various income possibilities and cost management in schools.
    I hope more parents understand this and implement some of your excellent tips. Great post!

  2. These are truly great ideas about saving money and teaching our children to do the same. Apart from explaining the value of money and saving, we can teach our children by being an example. Thanks for sharing such a great post.

  3. This is a fantastic and essential idea. You can make it all quite fun and the children will get a great sense of achievement when their envelope savings reach the required amount. Sad to see so many students struggling with debt when they first leave home. If only they had been brought up this way!


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