As a parent and a financial advisor it has always been important to instill the value of financial knowledge and to encourage other parents to teach their children to understand the fundamentals of good financial decision making.

Unfortunately, lessons in money management can fall by the wayside and by the time kids are starting to make their own money choices they do not have the tools to avoid costly mistakes.

I think it is an enormous oversight that schools don’t even teach the basics such as how to pay bills or why interest rates matter. Sadly, we will not likely see a shift in the education system anytime soon so, it must be left up to parents and guardians to teach financial literacy to their children. Ultimately, it is you who will benefit from having a responsible grown up who doesn’t need to borrow money from you or live over the garage due to poor money choices.

One of the most impactful ways to encourage informed financial decisions is to lead by example. Children absorb everything they see so if you conduct yourself in a way that demonstrates self-control and prudence in the way you make, save, invest and spend money, your children will certainly have a strong foundation to start with.

Teaching Financial Concepts

According to the Consumer Financial Protection Bureau (CFPB) children in elementary school should have a firm grasp on the fundamentals of saving, spending, investing and borrowing. They should also begin to assert some knowledge in more advanced concepts like compound interest, budgeting, and insurance against financial risk. By middle school, it is recommended that kids start learning about the stock market, interest rates, inflation, borrowing, and taxes. By high school, well-prepared students should be equipped with advanced knowledge of the impact of financial decisions regarding saving and investing, taking financial risk, how taxes affect income and what specific insurances offer protections against. The CFPB has created a tool to help establish a financial education curriculum for ambitious parents and forward thinking schools that can be viewed here.

That may seem like a tall order for many parents but their ways to incorporate these technical lessons into everyday life through experiences that shape their understanding of the financial concepts without necessarily knowing them by name.

If you started out by sitting your fourteen your old down and saying “Okay, today we’re going to discuss inflation and how interest rates can impact the long term bond market.” You will likely be met by a glazed over stare and scant enthusiasm. But if you explain it with examples and in more simple terms, they might be able to grasp the concept and perhaps, enjoy the additional questions that might arise from understanding a new idea. There are some interesting resources out there that can help parents with financial lessons. A great one for inflation, since we’re on the topic is a YouTube playlist called Econ Vids for Kids.

Teaching Good Habits

Childhood Lessons

The idea that people work for money may be novel to most children. So lessons about money often start with chores. Kids can learn that by doing work they can earn money, then they can use that money in different ways. It’s important to establish this connection between work and money and sow the seeds for a strong work ethic early in life.

Children should also learn the value of saving the money they earn. It’s no surprise that many children are impulsive with money and want to spend the cash as soon as it’s in their hands. They should see that impulsive spending is not the point of earning money. In this modern day of technology, it should come as no surprise that “there’s an app for that.” Indeed there are a whole bunch of them. A few that have received positive reviews from parents and educators are iRewardChart, ChorePad, iAllowance.

Teen Challenge

Kids get more expensive as they get older—all parents who have survived the teenage years can testify to that. Clothes and toys come with bigger price tags. Sports and other extracurricular activities require more money. And when teenagers begin to drive, the cost of car insurance premiums can put a dent in many household budgets.

Plus, many teenagers are also making preparations for college and other paths to careers beyond high school. Those plans come with costs as well, including tuition, transportation and a host of other living expenses that add up quickly.

So teenagers have their fair share of reasons to save. Hopefully the lessons they learned as younger children have been well established and they are able to put them into practice.

Adolescents also have more opportunities to work and earn money. Their increased earnings potential can make the incentive to save more powerful. Moreover, for teenagers working their first real jobs, those initial pay stubs show them how taxes affect their income—another chance for parents to teach children an important lesson that can carry on into their careers.

Finally, many college students also get their first lessons in borrowing at this age. Applying for education loans is common for students these days. Parents can help their children navigate the complexities of the loan application process, understand the burden of debt and the impact of interest rates, and ultimately set up a plan to start paying off those loans as quickly as possible after graduation.

A fantastic tool to familiarize this age group with creating and sticking to a budget is Budget Challenge. Students can learn how to pay bills, handle financial mistakes and setbacks and save for retirement by actually using a 401(k).

Avoiding Debt as a Young Adult

Children eventually grow up and (hopefully!) move out of the family home, eager to embark on their own lives. That does not mean their financial education comes to an end. Parents should continue to share lessons on finance and money management to help adult children learn advanced skills and turn the knowledge they have already accumulated into lifelong habits.

A household budget is an essential tool for young adults living on their own for the first time. A budget should be used as a financial guide to help prevent overspending and living beyond their means. But many may not know how to create one or even where to start. Parents can share their own household budgets to help their adult children see all of the costs that should be considered. They can also find sample budgets and templates online that make it easier to plan for monthly expenses and manage household expenses.

Financial Literacy is a Long-Term Investment

Like any long-term investment, the ultimate reward from teaching your children financial literacy will come down the road. By showing children the value of money and instilling the basics of a financial education in the earliest ages, parents can help their children be skilled enough to make smart financial decisions as adults and be able to plan for their own future financial security.