Children need at least a basic education in managing money. Basic financial literacy means means understanding money and how to manage your money wisely. Unfortunately, financial literacy is not regularly or consistently taught to all K-12 students in the U.S. One bright-spot exception is Texas, where financial literacy is a key part of K-12 math learning standards every year.
There are indicators that students who don’t learn economics and personal finance in school grow up to be adults who don’t understand how to manage their money or the economy in general.
One sign of poor financial literacy is the staggering level of consumer debt in the U.S. According to the Household Debt and Credit Report (Q4 2023) from the Federal Reserve Bank of New York, American households currently owe $1.13 trillion in credit card debt.
And while average U.S. credit card debt is high, average savings rates are low. According to a July 2023 survey by The Motley Fool Ascent, the median saving account balance in the U.S. is only $1,200. What’s more, the average savings account balance is down from $4,500 in 2022. According to FRED Economic Data from the St. Louis FED, the average U.S. household savings rate in 2023 was 3.7 percent, compared to 14.8 percent in the E.U., according to Eurostat.
Slowly, the drive to teach financial literacy in schools is gathering steam. The Council on Economic Education (CEE) publishes a Biennial Survey of the States. Highlights of the 2022 survey and 2023 updates since the 2022 survey show that:
- 30 states have now passed legislation or regulatory changes to require students to take a course about or including personal finance.
- 25 states require students to take an economics course.
- 25 states require an economics course for graduation, up from 22 states in 2011.
- All 50 states and D.C. include economics in their learning standards (though only 46 of those states require that the standards be implemented and only 25 states require that high schools offer an economics course).
- 47 states include personal finance in their learning standards, up from 21 states in 1998 (though only 40 of those states require that the standards be implemented and only 27 states require that high schools offer a personal finance course).
As you can see, hurdles abound — and persist.
The benefits of teaching financial literacy
Teaching children financial literacy has a positive impact on their later life. According to a 2006 report from NASBE, “Individuals graduating from high schools in states that mandate personal finance education courses have higher savings rates and net worth as a percentage of earnings than those who graduate from schools in states without such a mandate.”
However, the vast majority of schools today emphasize reading, writing, math, and science in preparation for standardized tests, and that means there isn’t a lot of time left over for other subjects. If parents truly want their child to become financially literate, it’s up to them.
Eileen and Jon Gallo, authors of The Financially Intelligent Parent: 8 Steps To Raising Successful, Generous, Responsible Children identify eight steps that parents can take to provide a basic foundation in money skills for their children. GreatSchools.org asked the Gallos to describe their steps for parents, and here is what they shared.
7 steps to teaching financial literacy for parents
Step 1: Encourage a work ethic.
Eileen: We think that it’s really important for children to develop a work ethic. That involves helping kids focus on schoolwork and to contribute by doing family chores. Extracurricular activities are also very important — if the child is not over-scheduled — because kids learn how to work with others as a team. Also, part-time jobs are appropriate, if the kids are old enough.
Jon: There’s a fascinating study out of Harvard that studied adult mental health. It studied not what makes people mentally ill, but what makes people mentally healthy. One of the findings was that the single biggest predictor of adult mental health was the ability to develop a capacity to work between the ages of 6 and 12. What Harvard calls a “capacity to work” is what we call a work ethic, namely the ability to be able to feel that what you’re doing is important, that you’re responsible for what you’ve accomplished and what you’ve failed to accomplish. So by helping our kids develop a work ethic between the ages of 6 and 12, we’re really helping them to be better prepared for life. Our eight points are really designed to help our kids to grow up to be responsible, self-sufficient, and happy adults.
Step 2: Get your money stories straight.
Jon: What we mean is to understand your own relationship with money. As parents, we’re teaching our kids about money all the time by the way we deal with money. It’s really important that we as parents understand what money means to us psychologically and emotionally. Is money something that scares us so we try to avoid dealing with it? Is money a scorecard for us? We recommend that parents actually sit down and figure that out. In some cases what money means to you is something that you don’t want it to mean to your kids. If you grew up in a family in which your parents went through bankruptcy two or three times, or one of the parents was a compulsive gambler and they lost the house, then money can be a topic that is filled with frightening emotions. If that’s what money means to you, you won’t want to convey those emotions to your kids.
Step 3: Facilitate financial reflection.
Eileen: If you give a child an allowance you’re giving him the opportunity to reflect and to think about the consequences after spending the money. “Am I happy with what I bought? Now I don’t have enough money to buy this other thing. Maybe I should have done something differently.” It gives them practice in making decisions and making choices, and in really experiencing consequences.
Jon: We make the comment in the book that children are naturally impulsive. Kids often do things without thinking about the alternatives. “Could I have done something else and what would have been the consequences if I did?” Our point of facilitating financial reflection is to help kids to learn to think in terms of choices, alternatives, and consequences. That’s something that you can start doing when they’re quite young, like 3 or 4 years old. It’s a skill that is helpful to them their entire lifetime. You can use an allowance to help kids learn to think in terms of choice.
Eileen: Parents need to answer questions that kids ask. “Are we rich? How much did this house cost?”
Jon: “Why can’t I spend my allowance on anything I want? Why don’t we take vacations to Europe every year? Why don’t we buy a new car every year?” Kids ask questions about money and parents should be able to answer them.
Eileen: And have discussions. Ask the kids questions. Find out why the kids want to know this. Explore why they’re asking this question right now.
Step 4: Become a charitable family.
Eileen: That’s so that kids begin to understand that there are other uses for money besides just buying things for yourself. I think it’s really important to do it as a family. Children need to have charity become concrete so that they can experience it.
Step 5: Teach financial literacy.
Jon: That’s everything from giving them an allowance to introducing them to savings and checking accounts to introducing them to plastic. [The Gallos recommend introducing teens to credit cards. As they say in their book: “We make this recommendation not because credit cards are wonderful but because they are everywhere, and we can no more ignore our child’s need for credit card education than we can ignore his need for sex education.”]
Step 6: Be aware of the values you model.
Eileen: Eighty to 90 percent of all communication is nonverbal. Do you as a parent spend a lot of money? Do you have to have the latest thing? Just be aware, very conscious of your behavior. How you spend your money is based on values. Do you spend a tremendous amount of money on clothes? Do you have to have a new car every year? Do you save for charity? Do you invest? All of those things are values.
Step 7: Moderate your extreme money tendencies.
Jon: In the book, we talk about one mother who would go shopping with the kids. She’d grab a handful of credit cards, give one to the clerk and say “Let’s see if the credit card gods are smiling on me.” She’d never know whether she’d maxed out her credit cards or not!
Eileen: The other extreme is people who are so frugal that it compromises how they live their lives. If you’re overly frugal, kids grow up feeling deprived.
