Financial concerns are among the main causes of stress in adults. This isn’t a surprise, as a lack of financial stability impacts nearly all areas of your life in some way.
While most people can’t eliminate this stress or counter life’s uncertainties completely, solid financial literacy goes a long way. By teaching your child the fundamentals of money management early on, you can help them build a more stable future.
This guide will introduce you to financial literacy for kids and teach you the following:
- Why financial literacy is crucial to a more carefree life
- Where to find child-friendly personal finance resources
- What aspects of financial literacy you should cover, and how to approach them
The Importance of Financial Education for Kids
Financial literacy isn’t merely a collection of theoretical knowledge—there’s hard evidence that it translates into wiser decisions. A recent FINRA survey shows that people with higher self-reported financial literacy are less likely to make numerous money mistakes, such as:
- Not having an emergency fund
- Spending more than their income
- Incurring late fees and exceeding credit lines
The sooner your child develops proper financial awareness and adopts the necessary skills, the lower their chances of running into these issues. It’s much easier to stay responsible and frugal if such traits are nurtured during childhood, so you should give your child the right foundation for their financial well-being. Fortunately, there are plenty of resources you can turn to for help.
How To Teach Kids Financial Literacy
Source: Alexander Grey
Developing healthy spending habits involves a mix of theory and practice. When it comes to the former, you can use various media to give your child the necessary knowledge.
Many experts have written personal finance books aimed at children, which use simple analogies, storytelling, and other strategies to bring financial concepts closer to them. Some examples of such books include the following:
- “Grandpa’s Fortune Fables” by Will Rainey
- “A Kid’s Activity Book on Money and Finance” by Allan Kunigis
- “Investing for Teens” by Alex Higgs
You can also find numerous courses for children on platforms like Udemy and Coursera. People—particularly children—are visual learners, so multimedia formats are an excellent way to increase information retention.
If you need a comprehensive way to teach your child about money, you can find various financial literacy programs for different age groups. They might come at a high cost but could be worth it, as such programs make up for the lack of dedicated financial education in schools.
As for practical knowledge, you can come up with countless activities to let your child apply what they’ve learned, depending on the aspect of financial management you’re covering.
What Areas of Kids’ Financial Literacy Should You Focus On?
To ensure your child manages their future income wisely, you should teach them four fundamentals of personal finance:
Source: Towfiqu barbhuiya
Following a budget without deviations is an essential skill everyone should have. The goal is to make your expenses as predictable as possible and optimize your income accordingly. To ensure your child can create a budget and stick to it, you should give them an opportunity to manage their own money.
This will most likely happen through an allowance until your child gets a job. Whether you give it in cash or through a prepaid card, encourage your child to spread out their allowance and avoid running out of money.
The “every dollar has a purpose” method is the simplest one to teach your child. Help them create budget categories and allocate the appropriate amount to each. Monitor their spending and balance, and try not to give your child extra money if they go over the budget. This way, they’ll know there are consequences to poor money management and will become more disciplined.
There’s no financial security without saving. Living paycheck to paycheck is highly risky, so you should teach your child to set aside at least a small portion of their income for rainy days.
Your child may not understand the importance of a safety net while they’re young, so you’ll need another way to motivate them to save up. Luckily, there are several ways to do this, most notably by:
- Encouraging saving for a more expensive toy or item to set an appealing goal
- Rewarding your child when they save up—you can pay a small bonus if they meet their goals
- Simulating bank-paid interest on savings to help your child grow them
You can also actively participate in the child’s savings by opening a bank account for them. Use a restricted option until you’re confident in your child’s responsibility, and let them watch as their savings accumulate.
Source: Joshua Mayo
Investing likely won’t be a topic before your child enters their teens. It may take a while to teach them how it works, as there’s a lot you need to cover. Start by explaining some basic terms, such as the following:
|Asset||Anything that has economic value and the potential to generate a return|
|Stock||Ownership of a particular company expressed in the number of purchased shares|
|Dividend||Interval-based income divided between shareholders|
|Capital gain/loss||The difference between the amount of money the asset was bought and sold for|
|Portfolio||A collection of different investment assets (stocks, real estate, crypto, etc.)|
When your child understands the fundamentals of investing, you can help them set up a model portfolio by picking some assets without actually investing in them. As they build up some investment skills, they can get started with small amounts of money to gain first-hand experience.
Loans, credit cards, and similar financial products are virtually unavoidable in an average person’s life. Your child will most likely obtain them at some point, so you should teach them to manage borrowed money responsibly.
An effective way to do this is to act as your child’s lender. Let them borrow a specific amount of money and then simulate the relationship they’ll have with the lender by agreeing on the following:
- The amount they have to pay back
- Payment due dates
- Consequences of late or missed payments
Besides instilling this form of discipline, there’s another important task you shouldn’t ignore—credit building. Your child will need a solid credit profile to obtain loans at favorable terms, so you need to stress the importance of maximizing their credit score.
While your child’s credit profile will be in their hands when they grow up, you can give them a significant advantage by helping them establish it early in life.
How To Help Your Child Build Credit
There’s not much you can do to help your child learn about credit building in practice. They won’t be eligible for most credit products before becoming a legal adult and will most likely have to wait until they turn 21 to get their first credit card due to the CARD Act restrictions.
One way to give your child some hands-on experience with credit is to add them as an authorized user of your credit card. Doing so would create a credit profile for your child, who’d inherit your credit history. As they use the card, their activity will impact both credit profiles, which is quite risky.
Besides, not all banks let you limit authorized users’ access to your card. If your child misuses it, they could significantly damage your credit profile and increase debt.
When you remove your child from the card, all credit history associated with it gets deleted from their credit profile. This means that all of the above risks aren’t worth it, as they’d have to start from scratch anyway.
If you need a risk-free and effective way to jump-start your child’s credit profile, Austin Capital Bank has a solution—FreeKick.
FreeKick—Parent-Sponsored Credit Building for Minors and Young Adults
FreeKick combines a Federal Deposit Insurance Corporation-insured (FDIC-insured) deposit account and additional services to help you establish and build your child’s credit profile. If your child is between 14 and 25 years old, you can invest in their future in three quick steps:
- Create a FreeKick account—Go to FreeKick.bank and choose a plan based on the one-time deposit
- Set It and Forget It—FreeKick automatically builds 12 months of credit history for your child
- Keep Growing—Renew the account when the 12-month term ends to keep working on your child’s financial stability. You can also close the account and get your deposit back
Plans depend on the deposit amount, and you can choose between three convenient options:
- Free—One-time FDIC-insured deposit of $2,500
- $49/year—One-time FDIC-insured deposit of $1,750
- $99/year—One-time FDIC-insured deposit of $1,000
As FreeKick builds your child’s payment history, it gets reported to the three major credit bureaus if the child is a legal adult (18 or over in most states). A minor’s credit history can be reported as soon as they become an adult, as credit bureaus don’t accept reporting for underage children.
If you close the account while your child is still a minor, no credit history can be reported due to the mentioned restrictions.
FreeKick’s Credit Monitoring Services for Additional Peace of Mind (Coming Soon)
FreeKick doesn’t only build your child’s credit history—it also monitors it to reduce the risk of issues like inaccurate or outdated information. This way, FreeKick helps ensure your child starts their credit journey with a clean, error-free credit profile.
Monitoring also reduces the risk of synthetic identity fraud, a form of financial crime that minors are particularly vulnerable to. FreeKick safeguards your child’s information with the following services:
|Service||How It Works|
|Social Security Number (SSN) Tracing||Keeps track of all names, aliases, and addresses associated with a minor’s SSN, providing you with a mapped view of the identities connected to it|
|CyberAgent Dark Web Monitoring||Monitors internet activity associated with the trading of a child’s sensitive information|
|Full-service ID Restoration||A certified restoration specialist will dispute any fraudulent activity and restore your child’s identity in case of theft. Ancillary restoration services are backed by FreeKick’s $1 million insurance|
|Neighborhood Sex Offender Monitoring||Alerts you if a sex offender in your area registers under a different name using your address|
Besides the abovementioned, adult children are eligible for additional services that keep their documents and information safe:
|Service||How It Works|
|Lost wallet monitoring||Protects credit cards, driver’s licenses, Social Security cards, and other important documents|
|Change of address monitoring||Reports any redirections of mail through the USPS|
|Payday loan monitoring||Offers an alert if a child’s SSN is used to obtain payday loans|
|Court records monitoring||Searches court records to detect any unauthorized identity use|
Let your child enjoy the many advantages of a stellar credit profile—sign up for FreeKick.
Featured image source: Fabian Blank