Nurturing Financial Literacy in Your Child: Experts Weigh In

Although much is made of the generational divide, there is one thing American children and parents can all agree on – the importance of money.

According to a recent survey of over 1,000 American teens and their parents Greenlight Financial Technology, 93% of adolescents believe they need financial knowledge and skills to achieve their life goals, while 97% of parents agree.

Yet when it comes to making sense of dollars, many teens are still coming up short. Nationwide, average teenagers score a mere 64% on the National Financial Literacy Test.

Financial Literacy

Parents try various methods to pass on their money know-how to the next generation, with many opening bank accounts or debit cards for their kids as a pillar of their financial education. Though introducing children to the world of banking has several benefits, the process requires careful guardianship. First impressions count, and the last thing financially-conscious parents want is for their kids to learn the wrong lessons about money.

Handled the right way, such experiences can not only give them a headstart on their peers but endow them with financial competence beyond their years.

“As a child, I recall my Godmother mentioning she had set aside money for me in some Bonds,” Paul Doak, CFP and Advisor at I.D. Financial. “That got me interested at the age of 5 – what is a bond and what is a stock… And gave me a better understanding of money than most adults I encountered.”

This article will dive into nurturing financial literacy for the next generation and canvass some expert opinions on how to get your child off to the best start on their financial journey.

Baby Steps

Children can learn the basic building blocks of money from a very young age. Core concepts like saving, spending, and even compound interest can be effectively taught at home with a simple yet consistent pocket money regime. Financial literacy is not rocket science, and many kids learn fastest with tangible objects. The wisdom of basic budgeting can be imparted at the kitchen table with the help of a pen, paper, and a jar of coins.

Yet once children have the basics covered and show maturity, they may be ready to level up and take formal banking.

The best kids' savings accounts are designed explicitly for minors' needs. Some, like the BECU Early Saver Youth Account or USAlliance MyLife Savings for Kids Account, are ideal for children, while others, like Revolut >18 and Current, are more catered toward teenagers and young adults.

Bank accounts not only offer more security for kids than a piggy bank, but they also offer the convenience of added convenience ATM withdrawals and online banking.

As they get older, parents may want to apply for a debit card for their children. Many financial institutions, including Greenlight, Acorns, and Axos Bank, have cards designed for minors. For teenagers, who are beginning to exert independence and become consumers outside the home, this can be a valuable earning experience. However, parents should be aware that some providers enforce minimum deposits, monthly fees, or other requirements, so it's important to choose the optimal account for your child's needs.

However, some advisors say a spending tool like a debit card should only be granted once they have a job of some kind.

“I would not advise a debit card until they are earning their own money regularly,” says Paul K Doak, CFP and Advisor at I.D. Financial. “It will help them see the value of their labor to what they are buying.”

Jon McCardle, AIF and President of Summit Financial Group of Indiana agrees. He sees there is little need for a debit card for children and that debit cards may expose them to identity fraud.

“So, at what age would we allow that? (When) the child begins to get an allowance or a job,” says McCardle. “The council we give is that for every dollar they earn, they save 50% of it and can spend the other 50% on whatever they feel they want.”

Under Control?

Effectively monitoring is one of the chief concerns among guardians introducing their kids to finance. Most parents want to ensure they have firm control over what's happening so things don't get out of hand.

“Numerous companies offer cards that parents can control through a mobile app. Parents can transfer funds into their children's accounts, such as money earned from chores, and also monitor their spending,” says Kevin M. Arquette, CFP and Managing Partner at WealthPoint Financial Planning.

Yet, as children age, how to transition them toward full financial autonomy inevitably looms large over dining table conversations.

According to a Wells Fargo survey from 2021, nearly 70% of teens said they should be able to make purchases using their own money without restrictions, while only 44% of parents agreed.

The silver lining here is that teens are more open to allowing parents to monitor their finances compared to other aspects of their lives. In the same survey, nine in ten said they'd prefer their parents view their purchase record than read their text messages.

Typically, parents maintain joint ownership or supervisory control. It is not a time for the parents to step back but to be ready to handle difficulties that may arise or correct any negative financial habits as they mature into young adults.

Financial Responsibility

Yet, as their kids grow, a parent's role evolves. They become less the whole financial facilitator of the child to a kind of lender of last resort. Although parents are always there for emergencies, experts emphasize the need to still make the kids pay their way.

“At transition, when they move out or go to college, we still recommend mom and dad stay in position to transfer money to them as necessary but not freely,” says McCarrdle.

“This means if the child is over-drafted, we save them once on a transfer but offer counsel after doing it. The 2nd and 3rd and so on, they are required to cover that on their own,” he adds.

“Some children must learn the hard way the lessons about money. If the cost of that lesson is a few hundred bucks of overdraft fees, it is much cheaper than being past due on a mortgage, car, or credit card.”

Such tough love may hold them in good stead for the future. This way, as they take on greater responsibility in their future, for instance, in opening a real estate investment account, they have the financial know-how to manage it effectively.

Overall, opening a bank account for children can be an opportunity to nurture financial literacy, savings habits, and money management skills. However, parents should carefully plan and consider fees, parental control, and financial discipline to ensure their children grow into fiscally empowered individuals.

This article was produced and syndicated by Wealth of Geeks.