A Recipe for Youth Financial Literacy

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Imagine someone handed you a chef's hat and apron and dropped you into a trendy restaurant, directing you to "fuse elements of French and Thai cuisine." Problem is, you've only watched cooking shows and, at best, you've sliced the occasional carrot to help your dad with a stew.

This is essentially the state of financial literacy today. Folks aren't being taught the skills necessary to become financially literate. They are tossed a hat and an apron and are expected to just figure it out. This is a recipe for disaster. Financial Literacy, like becoming a top chef, can only be achieved by developing skills over a period of time...a long time.

So much effort is directed at our young adults in an effort to fix poor habits. The people involved in those efforts are doing amazing work, but imagine if more or most of those amazing efforts were focused where they really need to be: building good financial habits in our younger kids.

There's a dichotomy in place regarding youth financial literacy. People almost always agree that my passion for teaching young kids about the value of money is the direction we need to head, yet most decide not to take this road. Parents delay teaching — or even talking about money — until their kids get older, and financial educators most often focus their efforts on teens and young adults. So why should we teach kids, even preschoolers, about the value of money? Because kids can understand a lot more than you think BEFORE they reach kindergarten. The PTA (Parent Teachers Association), NCEE (National Council for Economic Education) and CUNA (Credit Union National Association) all agree. In fact, CUNA has an entire set of resources (Thrive by Five) dedicated to helping parents teach their preschool kids about money.

I'm constantly trying to think of ways to get my message across. After reading Julie Rains' post on basic financial planning, it dawned on me that it would be revealing to match up the key components of a solid ADULT financial plan with the key aspects of youth financial literacy. Not surprisingly, it turns out that the basics of an adult plan include behaviors that kids can learn at a young age. I pulled just a few relevant topics from Julie's post and noted how kids can begin to learn these skills through a basic program that can be started in or just before Kindergarten.

1. Pay yourself first!

By giving kids an allowance by the time they are five and mandating that they save at least a portion of that money, they can help build this most basic skill. My personal experience suggests that somewhere between four and five is a good time to start an allowance, depending on the maturity of the child. We use a three-jar system to allow them to Save, Share (charitable donations) and Spend Smart. (Note that we don't just label the jar "Spend," but rather we wanted it to be about more than just spending. We wanted our daughters to eventually become smart consumers.)

2. Save for your retirement (matching).

We use the Allowance Magic program (full disclosure, I sell the book on my site) and the system incentivizes saving by allowing parents to "match" some percentage of allowance saved. For example, when our daughters put a dollar in their Save jars, they get an additional quarter. How much you match is your choice. By the way, the book is short but detailed enough to get you all the way into the teenage years.

3. Live within or beneath your means.

By embracing financial literacy and teaching it to their kids, parents can realize their own deficiencies and make adjustments. A great by-product of starting a program with our kids has been to improve my own thinking about needs vs. wants, making smart spending choices, and paying myself first.

4. Save for major purchases.

Goals, goals, goals! If your child really wants something, have him/her draw a picture of the item (or print it from a website), write how much money it will cost, and paste that on his/her Save jar. You can even go a step further and note how many weeks of allowance it will take to achieve the goal. Using goals to teach savings makes it tangible, and learning about goal setting is important for later achievement.

5. Give money to charity.

It's a good idea to mandate that a portion of the weekly allowance be plopped into the Share, or charitable giving, jar. Then look for opportunities to give this money away that's tangible for them. For example, our school collected money for Haiti relief, and our daughter was able to empty her Share jar into to collection jar. The more tangible the application, the better.

I am hopeful that this will help convince a few more parents that teaching very young kids these basic tenants can help ingrain these habits early, so that they (or others) won't have to break bad habits later.

Let's give our future chefs more than just a big hat and an apron!