Financial literacy for kids may seem like a big topic, but they’re going to need to understand money.

To a child, money is often an abstract concept, especially in a world of direct-deposit paychecks, debit cards and peer-to-peer payments. Even if your son or daughter gets an allowance, their understanding of money is probably fuzzy beyond knowing what they can buy with their allotted weekly amount. He sees you buy gas at the pump or groceries at the store with a plastic card. She sees you deposit your checks via smartphone, or hears you say that you’re paying bills online, but that’s abstract, too.

Unless you teach them, children have no idea that electricity, water, Wi-Fi, cellphones, television, gas, car insurance and taxes take actual cash out of your pockets.

Financial literacy for kids may seem like a big topic, but they’re going to grow into a world where they need to understand savings, interest, debt, credit cards, impulse purchases, budgets, credit ratings, student loans and – maybe the hardest thing to learn – value. So how do you approach finance for kids while they’re young?

Felix J. Meneses, Senior Vice President for Cadence Bank, says parents should stress savings with a short-term goal in mind so kids can see the payoff.

“If they want a toy, have them contribute to savings,” he says. “Then after four weeks or so, go get the toy. Connect the payoff to the effort. This will work into their teenage years, with a car or something else.”

Lessons about money can begin at any age

One of the things that’s hardest for kids to learn is the difference between want and need.

“Everything around them is geared to immediate payoff. Delayed gratification can have a powerful impact if we teach them the value of working towards a financial goal early on,” Meneses says

For example, parents can set up three jars – “Saving,” “Spending,” and “Sharing,” into which money your child receives from an allowance or from gifts is divided. A $9 allowance for a 9 year old (many experts recommend matching the child’s age, though it may be different if the child is expected to purchase certain things out of that allowance) would be divided, perhaps, into $5 for spending, $3 for saving, and $1 for sharing. The parent can also choose to match the saving bucket dollar for dollar as long as they keep it in the jar for a minimum timeframe. Over time, this teaches the concept that you don’t get to spend everything you get and that saving towards something can have powerful benefits.

When children are a little older, they can start to understand value – that generic ketchup costs less than brand-name ketchup, for instance, or that gas prices rise and fall on a sometimes-daily basis, or that we pay more for heat in the winter than in the summer.

The President’s Advisory Council on Financial Capability organizes money concepts by age into “20 Things Kids Need to Know to Live Financially Smart Lives” in “Money As You Grow.” The basics:

• Ages 3-5: We need money to buy things; we work to earn money; we may have to wait for something we want to buy; the difference between want and need.
• Ages 6-10: We make choices about how to spend our money; we pay less when we compare prices; we shouldn’t share any information about money online; having a savings account keeps our money safe.
• Ages 11-13: We should save at least 10 cents of every dollar we get; entering information about money or credit cards online is dangerous because other people can steal the information; a credit card represents a type of loan that must be paid back; our money earns more money if we put it in savings and keep it there (compound interest).
• Ages 14-18: Colleges are expensive, and the cost helps inform the choice of school; we get in trouble if we use credit cards to buy things we can’t afford; when we get paid for a job, we lose money to taxes; IRAs increase it for when we are older.
• Age 18 and over: Credit cards need to be paid off in full every month or we pay interest and penalties; we all need health insurance, and must pay for it; in addition to savings, we can earn money by investing, but there is some risk involved; before choosing to invest in stocks or bonds, we must consider both those risks and the annual expenses of the investment.

The Jump$tart Coalition for Personal Financial Literacy, a 501(c)(3) nonprofit organization, has coalitions in all 50 states and more than 100 partners in business, federal agencies and national nonprofit organizations. It works to educate and prepare children and young adults to be successful adults.

The organization periodically publishes its National Standards in K-12 Personal Finance Education, divided into sections on Spending and Saving, Credit and Debt, Employment and Income, Investing, Risk and Insurance, and Financial Decision-Making. Although intended for classrooms, parents can also use this publication to help develop overall competency. It includes age-appropriate “knowledge statements” for each category that can help parents pace their teaching and understand what the child is capable of absorbing at each level.

At Cadence Asset Management and Trust, we utilize a Wealth Empowerment Program designed in large part to engage and educate the next generation,” Meneses says. “As part of that program, we sometimes ask our clients to bring in their teenage children to begin the education process.” Meneses likes to tell a story to the teenagers to help drive the importance of saving and the power of compound interest.

He gives an example of twins and the amount they can save if they begin early. One twin starts saving $2,000 a year beginning at age 20, and he stops at 40. The other twin starts saving the same $2,000 a year but doesn’t start until age 40 and saves a little longer, until he’s 65.

Assuming a 10% return, Meneses likes to have the teens guess how much each twin has accumulated by age 65. The difference is huge!

The twin that started at age 40 and saved for 25 years ends up with $218,364 at age 65. The one that started at age 20 and only saved for 20 years accumulated - surprisingly - $1,365,277.

“That’s the power of compound interest and starting early,” Meneses says. “They’re always very surprised by that, as are the parents.”

Remember: Let your kids learn

One last tip? Don’t prevent your child from making his or her own mistakes; it’s how we learn real lessons about money.

You can teach your child about money with jars and allowances, chores, and careful spending. But don’t neglect to let your child learn the hard way. Aboutsmartmoney.org recommends not bailing out your child if they spend their entire allowance on the day they receive it. Point out the mistake and let them figure out that not planning has its own consequences.

Learn more about money and financial issues

None of us ever stops learning about money and financial issues; it is a complex topic that touches every aspect of life. If you’re interested in more information about personal banking, lines of credit or investment advice, Cadence Bank offers families a full range of financial services. Check out the personal finance solutions on our website, or contact us today.

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.