Why is financial literacy important for kids?

As an adult, financial literacy is a huge part of our lives. Without it, we can find ourselves overspending, getting into high-interest credit card debt, and missing out on key financial goals. This is precisely why financial literacy is essential for kids. If they learn the basics at a young age, they can build upon those fundamentals as they grow up and develop sound money-management skills.

Below, we dive deep into answering the question, “why is financial literacy important for kids?” We also explore how to get started with financial literacy at a young age and some tips to help kids develop this critical life skill.

Why is financial literacy important to establish early?

Kids’ young minds are eager to learn and can absorb so much information. That’s why it’s so crucial to teach the importance of financial literacy at a young age. They may not be ready for the more nuanced parts of personal finance, but they will certainly grasp the basics and build upon that.

Another huge benefit to filling their heads with financial literacy is it builds strong habits from a young age. Habits, by nature, are tough to break. Forming habits releases dopamine in the brain, giving the person feelings of happiness and pleasure, further strengthening the habit. 

Imagine your kids equating good feelings with good money habits! Developing fiscal literacy at a young age will get this dopamine kick working early. Your kids will enjoy making sound financial decisions, making it easier to carry the desire for fiscal well-being into adulthood.

How can you get kids started with financial literacy?

Getting kids started in financial literacy is often the hardest part because you may not know where to begin. Try these five tips to get your kids to learn and develop an interest in financial literacy.

1. Start them early with age-appropriate conversations.

Start talking as early as possible with your kids. Once they reach kindergarten, they likely have the capacity to understand money on certain levels. At this point, you can start speaking with them about finances but do so on a level that’s appropriate for them.

For example, if you’re speaking to a kindergartener, avoid more complex financial literacy skills like the 50/30/20 budget. Instead, start to introduce them to earning and spending. Explain to them that you earn a certain amount of money from your employer for every hour you work.

Then show them how when you swipe your debit card at the store, the money moves from your account to the store’s account. This will help dispel the common idea kids get that swiping your debit card means everything is free. You can even speak to them more in terms of the number of hours worked to buy something instead of the dollar amount so they understand the value behind money and how to base their financial decision-making on this.

You can also discuss prioritizing finances on a level they will understand. For example, if they want a toy, explain the importance of taking care of their living expenses and savings before spending on wants. If there’s something you want that you’re saving for, show them how you’ll wait to purchase that item until you’ve paid all the other bills or have saved enough to have the financial capability to buy it with cash.

2. Talk candidly about finances.

You should start by tossing out the thought that personal finance has to be a taboo topic when it comes to your kids.

While some parents may be loosening up about their finances with their kids, many still see this as taboo. In fact, 31% of American parents never have conversations with their kids about household finances, according to a survey from CNBC and Acorns.

A great way to get your kids started with financial literacy is to let them see how it all works by bringing them into the world of your household finances. Let them see how utility bills, streaming subscriptions, credit card payments, rent or mortgage payments, taxes, and other payroll deductions all work.

While they may not fully understand what all the information you’re sharing with them means, they can see where the money is coming in and where it is going out. So, they realize that you work hard and make a certain amount of money every week, but that money needs to go to more than just fun experiences and toys — there are bills to pay from that too.

3. Explain how debit cards differ from credit cards.

Another key part of a good financial education is for kids to understand how debt works and how it can help and hurt their finances. A great way to do this is to lay out the differences between the two types of plastic in your wallet: debit cards and credit cards.

It’s easy for kids to see you swiping a card and think they are all the same, so show them how each works. After a shopping trip one day where you used your debit card, pull up your online banking history and show how that cash was immediately taken from your checking account — just like if you handed the cashier cash.

This will allow them to understand better that swiping a debit card is not free money.

Another time, if you used a credit card on a shopping trip, show them your credit card activity online and how instead of the cash coming from your bank account, it increased the balance on your credit card debt. Then show them your monthly payment history, so they can see that even though you don’t immediately repay the transaction, you eventually transfer cash from your bank to the credit card to cover the charge.

This is also a great time to educate them on the cost of using a credit card. Pull up an old statement and show them how the credit card issuer charges you an interest rate if you carry a balance from month to month. You can even show how interest charges can make a small purchase significantly higher and take a long time to pay off. And explain this is why you always want to pay off your credit card statement balance in full monthly.

This will help them understand the value of paying cash and the benefit of using credit cards for reward points or paying for monthly needs on a fluctuating income.

4. Explain your credit score and what it does.

As your kid reaches middle school or high school, and student loans and credit cards are on their minds, now’s the time to teach them all about credit scores.

Credit scores are confusing to even most adults, but we have guidelines to follow from the two most popular credit scoring models, FICO and VantageScore. Plus, they are too critical in hitting your financial goals to ignore at a young age.

Start by explaining that a credit score is similar to a numerical translation of your credit report and credit history. The higher your score, the better your credit history is, and the more likely you will get approved for the best credit cards and loan offers because the lenders can see you make sound financial decisions and have financial stability. Then lightly cover the main factors of a FICO score and VantageScore and how to keep them in good standing.

After all, that ensures they understand credit is something they can also repair through continued sound financial management. So, if they fall behind on a credit card or loan payment later, their credit score may decrease, but they can repair it with consistent payments moving forward.

5. Express the importance of saving money.

Saving money — retirement savings, saving for an emergency fund or rainy day fund, or saving for a big purchase — is key to financial success and securing your financial future. So, this is another piece of financial knowledge to instill at a young age. Plus, this is one money-management skill kids can add to their lives now.

Experts say we should save 20% of our take-home income, and you can get your child started on this now. If they have a part-time job, have them earmark 20% of their income for savings, whether that’s saving for the latest video game console, a first car, or anything else they want. If they’re younger and not working, they can save from other income streams, like allowances and gift money received during holidays and birthdays.

Explain to your kids how saving this fixed percentage every month can help streamline financial planning. They can look at their savings requirement and build a budget to meet their needs and wants. Plus, they can use this 20% savings rule to calculate longer-term goals, like how long it’ll take to afford their first car. And in the future, this can translate into retirement planning.

They’ll also need to know where to keep these savings, as they can’t just cram it under their pillow and expect to build wealth. If you choose the right savings account for them, you can show them the power of compound interest. Explain to them that if they have $10 in their savings account and earned 15 cents in interest, they’d make interest on the $10.15 instead of the original $10.

Point out that interest rates, such as those you pay on a credit card, can go the opposite way in the form of annual percentage yield (APY), which is the interest a bank pays you for keeping money in it.

Show them the difference in the APY between various financial products, such as high-yield savings accounts, traditional savings accounts, online savings accounts, certificates of deposit (CDs), money market accounts, and more. Use an interest calculator to demonstrate how their savings will grow in each option., pointing out the pros and cons of each.

The Greenlight app can help in this area with its rewards for saving and parent-paid interest. Plus, Greenlight allows your kids to explore another savings route, investing in stocks.

Financial literacy is a key part of growing up.

While finances were often a taboo topic in years passed, it isn't the case anymore. Bringing your kids into the household finances is a great way to eliminate the unnecessary fear behind this and show them why financial literacy is important.

Some ways to get them involved in household finances are discussing how you earn and spend money, how a lot of your income goes toward bills and taxes, outlining the difference between credit cards and debit cards, and more. The bottom line is to get them involved early and often so they understand the importance of good financial health.

The Greenlight app can help you streamline some of their financial literacy through its features like rewards on saving and parent-paid interest. Plus, the app gives them unlimited access to financial literacy lessons and interactive content. Give the Greenlight app a try today and see what it can do to help you and your kids.