Are your kids smart with money? Probably not! Nearly every survey on the subject shows that most adults—let alone kids—can’t answer the most basic questions about credit and debt, or saving and investing. Let’s not even try to discuss amortization and depreciation!

Pitfalls of Financial Illiteracy

Yet, we all know the ruinous impact of financial illiteracy. In Q2 of 2021, the average 401(k) balance is $129,300, according to Fidelity. And, as of 2018, almost 60% of working-age Americans have no retirement savings at all, according to the National Institute on Retirement Savings.

That’s not the worst of it. The Federal Reserve says in 2020, 30% of Americans didn't have the cash to pay an unexpected bill of $400, and the 2019 government shutdown revealed that 78% of employees are living paycheck-to-paycheck.

There can be no doubt that Americans are unprepared for retirement, and with 10,000 workers reaching age 65 every day, our nation is facing a retirement security crisis of unprecedented magnitude. If you want your kids to avoid this fate, you must make sure they become financially literate. That means, quite simply, that we must teach them about money while they’re young.

As obvious as this idea is, few children are getting the education they need. In 2020, only 21 states require high-school students to study financial literacy before they receive a diploma, according to the Council for Economic Education, and most employers provide little to no financial education in the workplace.

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Parents, the Burden Is on You

Yep, financial education has to start at home—and long before the kids enter high school.

Studies show that children make their first assisted purchases at age 3 (choosing the cereal box in grocery stores is the most common initial purchase), while allowances, which create opportunities for discretionary spending, often start at age 6.

You’re already talking to your kids about everything—religion, politics, sex, you name it. Everything, that is, except money. It’s not because you’re afraid of the subject. Rather, you simply don’t know what to say.

That’s what was discovered in a survey of parents. Nearly nine in 10 parents of 4- to 8-year-old children (89%) feel it's extremely important that their kids grow up with good financial habits, and nearly as many parents (91%) agree they should be the ones teaching their children these habits.

But virtually half of parents (49%) say they don’t know how to discuss money in ways they think their kids would actually understand. As a result, one in four parents never (or almost never) talk to their kids about household finances.

Principles of Financial Literacy

So let me help you. Start with The Squirrel Manifesto, the best-selling children’s book that Jean Edelman, my wife, and I wrote in 2018 for 4- to 8-year-olds. It sets the stage for having effective, meaningful conversations with your children, from tots to teens.

Your kids learn both by observing your behavior and through their own experiences. From allowances and birthday money to cash, they’ll one day earn babysitting or mowing lawns, set your children on the path to a lifetime of fiscal responsibility through thoughtful, intentional money habits. Here are four principles to begin teaching your children financial literacy:

1. Tax a little. Kids need to be taught from a very early age that they don’t get to keep everything they earn. Just as the government collects a third of your income in taxes, you should withhold one-third of your child’s allowance, birthday money, or babysitting earnings. Call it a tax to get them used to the fact that they can’t keep everything they earn—making them adjust their spending and saving plans accordingly. Then, without the child’s knowledge, put the “taxes” into a savings or investment account. When your child is ready to buy a car or go to college, hand over the account. They'll think you’re a hero, and they’ll see firsthand the value of delayed gratification and long-term investing.
2. Spend a little. One of the more obvious benefits of money is the joy of spending it. Allow your child to buy something they truly want—a comic book, toy, candy (purchases always subject to your approval, of course!)—so they can develop a positive relationship with money, based on a mindset of earning in order to spend.
3. Save a little. Not every item the child wants can be purchased immediately, as some items simply cost more than the child has available to spend. So, if your kid wants a video game, bicycle, smartphone, car, or college education—start every spending goal with a savings plan. By training them to save for long-term goals, you’ll be teaching the benefit of delayed gratification and arming them with the skills they need to avoid impulse buying.
4. Give a little. Children should be taught that the opportunities that come with money are also imbued with the responsibility and obligation to serve those who are less fortunate. For every dollar your child receives, decide on a portion that will go to philanthropy. The amount should be consistent, meaning that every time the child receives or earns money, the percentage must be material to reflect true sacrifice and service. Let the child decide who receives the money, whether it’s a religious institution, charity, or friend in need, and in the process, they might discover that sometimes the greatest joy in spending comes not from spending on themselves, but in supporting and caring for others.

The Bottom Line

By teaching your kids foundational principles of spending and saving at an early age, you can help them form positive financial habits that will last their entire lives.