Written by: Daniel Gleich
According to one study done in 2017, about one out of every five high school sophomores didn't have a basic understanding of how money works. Another study reported that only about one-third of states require a money matters class to be completed in order to graduate high school. That means that, for many students, it's up to parents, family, or themselves if they want to learn about financial literacy. The first thing to know? Learning about money and finance is an ongoing process. It starts when kids learn the difference between pennies and dimes, and as kids grow up, they should learn more about finances. Budgeting, loans, interest, investing and knowing things like what the Federal Reserve is are all important pieces of financial literacy. Luckily, there are many free resources available so that kids and families can learn about these important topics.
One important thing kids should learn is about wants and needs. Kids must learn the difference between a want and a need so that they can make wise decisions about how they spend their own money. For example, having a place to live, food to eat, clothes to wear, and medical care are all needs. Things like designer clothes, toys, trips, and eating out are wants. It's okay to spend some money on wants, but only after needs have been taken care of fully.
It's also important kids learn about money mistakes. After all, everyone makes them. The important thing is if a mistake is made to understand why it was a poor choice, and why that choice was made. Once someone knows these things it's easier to avoid poor choices in the future. Parents who talk about their own money management mistakes also help their kids understand how those mistakes get made and how to prevent them.
Learning how to put off getting something that's wanted is an important lesson everyone should learn. This is called delayed gratification. It's important to learn this early because it helps enforce the idea of why saving money is so important. Even kids often have things they want to save up for, like a video game console or a car for when they start driving. Saving is so important in adulthood. After all, most people have to work and save for things like vacations, homes, and retirement.
Knowing how to delay gratification will also help kids manage credit better when they get their first credit card. Everyone needs to understand how credit works. This includes things like credit scores, credit reports, interest, compound interest, minimum payments, and the difference between the various types of credit. For example, between secured credit like mortgages and unsecured credit like credit cards. The fact that so many teenagers need student loans to attend college means it is even more important for kids to learn early about credit and how it works.
Time and money have a strong relationship. However, that's not something kids (or even a lot of adults!) understand. Money saved and invested at twenty-two is going to be worth a lot more than money saved at fifty. Why? Compounding interest. Just like compounding interest costs people more money when it comes to debt, it makes them more money when that money is saved or invested.
Kids also need to learn how money works in the real world, including how much things really cost. $100 is a lot of money to a kid, but in reality, that much money is easily spent at the grocery store by many adults. Having some idea of how much cell phone plans, food, transportation, and other everyday items cost helps kids learn perspective. Families who don't want to share actual numbers with kids can talk in terms of percentages. For example, they can say that the mortgage payment represents 30% of their salary, utilities another 10%, and food costs 20%. Parents can also use this to talk about rising costs. For example, maybe groceries only represented 10% of all spending last year but due to price increases, that number is now 20% of all spending.
Learning about money and finances is a lifelong mission. The following resources will help beginners find the information they need to make wise money decisions.
What Does the Fed Do? (PDF)