Our page on Money Management and Financial Literacy explains that financial literacy is the ability to understand and use financial skills. These include being able to manage your money, create a budget, manage within it, and make investments.

The same page also, however, notes that figures from the World Bank suggest that around the world, only one in three people is financially literate.

This is worrying. Alan Greenspan, the former Chairman of the US Federal Reserve, has been quoted as saying that lack of financial literacy is the “number one problem in today’s generation and economy.” Common sense suggests that one of the most important ways to learn financial skills is from a young age. This means that parents need to step up and teach their children about money—but how? This page provides some tips about how you can do this.

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Building on a Foundation

The key to teaching financial skills is to build on a foundation over time.

Hopefully, therefore, you have been teaching your child about money over many years (and our page on Teaching Children about Money explains more about how you might do this). By the time they leave home and start to live independently, hopefully your adult child is more than capable of managing financially.

However, there may be subjects that have only come up since your child moved away from home, or perhaps that they did not understand when you mentioned them earlier.

How can you best support your now-adult child to develop this knowledge? These five tips should help.

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Tips to Teach Financial Literacy

1. Children are Never Too Young to Start Learning About Money

   Well, you probably don’t need to be telling your baby about your savings accounts as you change their nappies. However, money should not be a taboo topic around children. Talking about things is the fastest way to demystify them.

   This can start with quite young children and toddlers. For example, children need to understand the process of buying: choosing goods and then paying. They need to know that you have to have money in order to pay—whether that is cash or on a card.

   Ways to do this include:

   • When you’re in shops with your children, talk them through the process of buying. For example, if you are debating two options, and working out which is better value, explain that. When you have chosen what you are going to buy, say that now you need to go and pay.

   • When you are buying online, make sure that they understand that the system is the same: you choose what to buy, and then you pay. As far as young children are concerned, online shopping is magic: you click on the thing you want, and it arrives the next day in the post. Make sure they understand that there is money involved.

   • Make sure that you sometimes use cash, and sometimes pay with cards—and that your children understand that the two are the same.

   As your children get older, talk to them about topics like loans, including credit cards, and savings. Be prepared to answer their questions, and make sure that they understand the implications of borrowing money.

2. Children Learn Best from Experience

   Children will learn from you—but they will learn even better if you let them make their own financial decisions and mistakes.

   Obviously you’re not going to give a six year old control over the household budget. However, you can give them pocket money, and a money box or piggy bank to keep it in. You can also limit what you are prepared to buy for them by way of sweets, toys or treats, and instead, encourage them to use their pocket money.

   As they get a bit older, you can also open a bank account for them to save into, especially if you are lucky enough to have family members who will give the children money for Christmas and birthdays.

   You can then teach your children about saving up for things that they want, such as particular toys or gadgets. They can also see that if they spend all their pocket money as soon as they get it, they don’t have it later in the week or month to buy something else with it. It is particularly helpful if you don’t always step in to help them out.

   As children grow into teenagers, their level of pocket money can increase—as can their level of responsibility for deciding their own spending. Over time, you might move to a clothing allowance, or give them money for their own lunches rather than packing lunches from home. By the time they are 16 or 17, you might be asking them to pay for all their own leisure activities, school or college lunches, clothes and general expenses from their allowance. You should also, of course, be discussing their financial decisions with them, and talking them through crises like:

   • I already spent all my money for this month, and my friends want to go out this weekend;

   • I need to buy more socks/underwear, but I can’t afford it this month;

   • My [x] has broken, and I need to get it fixed, but it’s expensive; and

   • I forgot that I might want to go on holiday with my friends, and I haven’t budgeted for it.

   Why should you do this?

   Because when they are 18, they can leave home—and many will do so, heading for college or university. They need to know how to budget and handle money before they are on their own, and while you’re still there to bail them out if necessary.

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3. Don’t Assume Knowledge in Your Children

   It is impossible to stress this enough: don’t assume that your children already know something.

   Things that may be obvious to you might not be obvious to them.

   For example, many parents have reported being surprised by a child who responded to ‘No, we can’t afford that right now, we don’t have enough money’ with ‘Yes, you do, you have a card’.

   The children didn’t understand that the card was connected to a bank account. They simply thought that it was ‘magic’, and no money was required. This is probably even worse given the use of electronic wallets, and the ability to wave your phone over a payment point.

   If they are not given further information and explanations, these children are at risk of growing up into the kind of adults who think that you can use a credit card to pay off the bill for the same credit—or worse, that the credit card company is simply giving them money.

   Never assume that your children understand financial issues, however simple they seem to you.

4. Encourage Your Children to Save

   Lifelong habits are built during childhood. It is therefore a good idea to encourage saving from an early stage.

   This takes two forms:

   • Encouraging your children to save up to buy ‘big ticket’ items or against contingencies, which basically means not spending all their pocket money at once, but considering what else they might need later; and

   • Encouraging habits of economy, such as buying things when on sale, or buying ‘own brand’ rather than branded goods. It is also worth discussing false economies, such as buying cheap clothes and shoes that will wear out very quickly (our page on Saving Money on Clothes explains more about this idea).

5. Model the Behaviour That You Want to See

   It is hard to stress this too much: children will notice what you do, and pay more attention to that than what you say.

   In other words, if you keep buying yourself ‘little treats’ all the time, or splurging on things you can’t afford ‘because you’re worth it’, your children will notice. It won’t matter how often you tell them the value of saving, or staying within budget: they’ll just see what you do, and make note of that.

   If you want them to grow up financially literate, you need to walk the walk as well as talk the talk—and they need to see that.

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In Conclusion

All these tips really boil down to two things.

The first is that money should not be a taboo subject. Talk about it, explain it and make sure that children understand it. The second is that money should also be a practical subject. Children need to get experience in managing money, and a chance to make financial mistakes in small ways. This will help to avoid them making much bigger—and more important—errors as adults. If you always buy everything for them, on demand, they will never be able to learn these lessons.

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