Financial Literacy for Kids: A NerdWallet Q&A

Personal Finance
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When it comes to kids and money, many parents and caregivers are full of uncertainty. You may not consider yourself a financial literacy expert, or you might be concerned that your child will copy your financial mistakes. Here is the truth: we all make money mistakes at some point in our lives, and this doesn’t make you a bad parent.

All of your money choices, both good and bad, can be turned into positive learning experiences for your child. Research consistently indicates that the most important thing you can do to prepare children for their financial future is to have honest, thoughtful and regular conversations about money.

Continuing your own financial education is a great way to prepare, so we’ve put together answers to four of parents’ most popular money “kids and money” questions.

How should my kid spend money?

Your child should divide up money for different purposes, just like you do. Sesame Street encourages young children to set aside their money in three jars: one for short-term spending, one for saving and one for charity donations. It’s very important for young children to work with cash, as it reinforces the idea that money is a tangible item that comes and goes. When your child puts money in a savings jar or piggy bank, it teaches them that saved money is real, too. Plus, they can experience the fun of watching the money grow before their eyes.

How much should your child put in each jar? That’s a decision you should make together. Some experts recommend putting 20% in the savings jar and 10% in the charity jar, but your child may decide to contribute more, especially if you encourage some exciting savings goals.

Don’t just advise saving for the future. That’s good, but too abstract. Instead, have the child pick out a fun item to save for, such as a new bike, a video game or a concert ticket. This helps teach that patience leads to enjoyable rewards. You can also introduce your child to different charities and have him or her pick one based on personal interests. If your child loves dogs, for example, donating money to the local humane society could be fun.

Does my kid need a bank account?

When the child is old enough, absolutely! A savings account is perfect for older children who have already practiced spending, saving and giving real money away.

Savings accounts give kids (and teens) a safe place to store their money. Savings accounts also pay interest, so your child will get extra money as an added reward for saving it. Most banks will let your child open a savings account if you co-sign the application and assume full responsibility, but we recommend checking with your local credit union or community bank to see if it has a savings account just for kids. Kid-friendly accounts offer extra perks like prizes, money for good grades, financial literacy newsletters, and more.

When your child enters high school and has more opportunities to make regular purchases, consider adding a checking account. Checking accounts allow teens to practice adult money management skills while still under your watchful eye.

Should I give my kid a regular allowance?

Financial literacy expert Jean Chatzky says yes, noting that an allowance serves two purposes. First, an allowance forces your child to work with a limited amount of money and make choices about the best ways to use it. Second, it gives you an escape from the “I wannas” when you and your child walk into a store. When your child asks for a toy or a candy bar, you default answer can be, “If you want it, you can buy it with your own money.”

However, not everyone believes that allowances benefit children. Lewis Mandell, professor emeritus of finance and managerial economics at SUNY Buffalo, has claimed that a regular allowance, with no strings attached, is “akin to cruelty.” His views may sound extreme, but they are based on survey results suggesting that a regular allowance is an ineffective tool for teaching financial literacy. It’s worth noting, however, that even Mandell agrees that allowances are effective when combined with regular financial literacy discussions.

No matter what you decide, you should talk about money with your kids whenever you get the chance. For more allowance information, check out How to Raise a Money Smart Child, the Jump$tart Coalition’s guide for parents and caregivers.

How much should kids know about money?

Just like you, your child should learn as much as possible, and it’s never too early to start. Even basic lessons have a long-term impact. Your 2-year-old may not be old enough to count pennies, but is old enough to practice being patient and making choices. These skills will help build toward making smart money decisions throughout life. When your child handles real money, it helps set a solid foundation for understanding money in more abstract terms. Over time, credit cards, loans and investments will be easier for your child to understand.

Speaking of credit cards and loans, you might be wondering when it’s appropriate to bring them up in conservation. Your child will learn the most if you talk about financial products while you’re using them. For example, you can talk about how a credit card works while you’re paying a bill at a restaurant. You can talk about how a debit card works when you’re getting money from the ATM. When you’re making your monthly auto loan payment, talk about how you pay for the family car. You make important money decisions every day. If you involve your child, each one can become a teachable moment.

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