Financial Literacy for Your Children
Teaching your children to handle money wisely, especially spending carefully and saving for future goals, is a great family project. Making these lessons fun as well as meaningful is essential to creating financially literate kids. Here are some suggestions to help you get started.
MANAGING MONEY
To learn how to manage money, a child needs some money to manage. Since the idea is to start financial education when your child is young, that money will most likely come from you, probably as an allowance.
It’s best to establish and stick to a routine for when you pay the allowance, even though it might take some effort initially. If an allowance isn’t paid regularly (maybe weekly for small children and monthly for older ones), it will be difficult to instill the money management lessons you’re trying to introduce. To help kids understand their allowance in terms of real-world use of money, talk about your child’s plan for the new money when they get their payment.
A SPENDING PLAN
You can’t manage money—successfully, anyway—without a spending plan. The first step is deciding how the money will be divided. One approach is designating three containers: one for spending, one for saving, and one for giving. You can discuss what each category includes and what percentage of the total allowance goes into each container.
Here are some of the questions you can answer together:
Will spending include necessary expenses like lunch money and school supplies or will it pay for nice to have treats?
Will saving include short-term wants or only bigger-cost goals?
Do spending and saving get equal percentages of the total or is one more important?
What about a percentage to allocate to giving? For many parents, sharing and supporting others are a key financial lesson.
Don’t worry. There’s not just one correct answer to any of these questions. Start with what seems right to you, based on the lessons you’re trying to teach. You and your child can always agree to changes you want to make in the future.
To provide an incentive for assigning some of the money to long-term savings, you might make a matching contribution, explaining the value of always taking advantage of that kind of offer. For example, add 50 cents or a dollar to the savings for every dollar your child contributes.
OPENING A SAVINGS ACCOUNT
When the timing seems right, you can graduate from the savings container and open a savings account, ideally a joint account in your name and your child’s. Your own bank or credit union may offer what you’re looking for, which is an interest-bearing account with no fees while the child is a minor. If not, you can do a quick search for a bank with these features.
An account that pays interest is important because it’s a good introduction to the idea of putting money to work to provide earnings.
EXPAND TO INVESTING
With a saving habit established, the next step is sparking an interest in investing for the added growth it has the potential to deliver. Stocks are a perfect introduction.
Working together, make a list of some of your family’s, or child’s, favorite products: maybe a cereal, a popular sneaker, a clothing brand, or an electronic device. Research together the companies that make these products and go to the companies’ websites to find the current stock price. Make a point to check the stock price together on a regular basis. Keeping an eye on changes in the price can be a meaningful lesson in investment markets.
The key point you want to make is that companies sell stock, also called ownership shares, to raise money from investors. What the investors receive in return is the opportunity to profit if the company profits.
You can illustrate what you mean using the share price of one of the stocks on the list you’ve created or a well-known stock like Apple. In 1980, when Apple first sold shares, the price per share was $22. Forty-five years later, in January 2025, it was $249. It was also paying a 25 cent per share dividend four times a year. (Be sure to point out that over those 45 years the price went up and down, as all stock prices do.)
You’ll also want to make the point that not all companies are successful. That means you take some risk when you invest. In contrast, there is no risk in saving because bank and credit union accounts are insured. But savings accounts don’t grow as much as successful stocks do.
SETTING UP AN INVESTMENT ACCOUNT
One way to give your child ownership of stock informally is to sell him or her some of your own shares. For example, using your brokerage account, you could buy shares in a company you’ve researched together and decided has potential for success. Instead of buying 100 shares, you could buy 110, and have the child pay you market price for the extra shares.
To keep track of your child’s shares, you can set up an online spreadsheet. Eventually, you can transfer the shares to a brokerage account in the child’s name when he or she is old enough to own one—typically 18 or 21.
If this arrangement seems too casual for you, you can open a separate account for your child’s investments, such as a custodian account under the Uniform Transfer to Minors Act (UTMA), which you manage until he or she reaches the age of majority.
The important thing is getting into the mindset that when it comes to investing, the sooner you start, the better. You don’t need a lot of money to start investing, but it is, at least historically, the best way to start building a solid financial foundation for a lifetime of financial stability.