Teaching Financial Literacy: Why You Need to Start from a Young Age

Middle schoolers Stockton Carlson and Calvin Lambert noticed some chatter on social media in 2021 about video game retailer GameStop (GME). At the time, the video game enthusiasts were participating in a statewide stock market simulation with their class at Vista Heights Middle School in Saratoga Springs, Utah.

Shares of GME had spiked the day before, so Lambert and Carlson decided to jump in—just in time for GME to surge again in another meme-fueled frenzy. They eventually grew their simulated money from $100,000 to $171,526.61 over the 10-week span of the contest and scored first place in the middle school category.

“We learned that social media, and Reddit in this case, can really have a big effect on things,” Lambert told the contest organizers.

A lesson in investing is a key component in teaching financial literacy, which can also include lessons on earning, saving, reducing risk, spending, and borrowing. Research has long shown that when it comes to teaching kids how to manage their money, it’s better to start young to build money knowledge and habits that will last a lifetime.

In 2008, Utah became the first state to require a semester of personal finance education as a requirement for high school graduation. Now, educators all over the country are exploring ways to start teaching financial literacy earlier, including in elementary school.

“It’s one thing to know the skills, but it’s also highly beneficial to start learning how to apply them into your everyday life,” said Brittany Griffin, policy and communications deputy at the Utah Office of State Treasurer, a member of the state’s financial literacy task force. “In an ideal world, parents would start talking with their children about money very early on.”

U.S. Financial Literacy Gaps

Closing gaps in financial literacy could help close wealth gaps. Among different income, racial, and gender groups, you’ll often find disparities in financial literacy.

First, there is a significant gap in financial literacy between rich and poor households. For example, Americans quizzed by the Federal Reserve Bank of St. Louis on basic financial concepts generally did better when they had higher household incomes.

Research has shown that Black and Latinx people have lower levels of financial literacy than White people, due in part to different socioeconomic statuses, according to a 2020 study from the University of Texas Rio Grande Valley.

It's important to note that there are many anti-minority and anti-Black government policies in the U.S. that have systemically perpetuated finances and wealth and lead to a racial wealth gap. In addition to income inequality and historic discrimination in U.S. housing policy, education disparities have historically impacted the creation of the wealth gap, too.

Educational inequalities usually begin early in life. In the U.S., the odds of attending a high-poverty or high-minority school depend largely upon a child's racial or ethnic background and social class. For example, Black and Hispanic students are more likely to go to high-poverty schools than White or Asian American students. And attending a high-poverty school lowers math and reading achievement for students in all racial or ethnic groups—an effect that is still relevant today.

Finally, multiple studies have shown that women generally have lower levels of financial literacy than men, which can put their financial security at a higher risk. One 2014 study found that only 22% of U.S. women had basic knowledge of how interest rates, inflation, and risk diversification work, compared to 38% of men. Confidence may play a role in this difference, as another study showed the gender gap was cut in half when the researchers took away the option to answer “I don’t know.”

The Benefits of Teaching Financial Literacy

Financial education can play a role in helping close wealth gaps in the U.S. People tend to make much better financial decisions when they’re armed with knowledge about how money works. Below, find are some other key advantages of financial literacy.

Building Good Financial Habits

People who scored better on a test of financial literacy were more likely to spend less than their income, have an emergency fund, and have a retirement account, a report by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation found.

Financial literacy has also been associated with better planning for retirement, a lower tendency to borrow against 401(k)s, and greater likelihood of investing in stocks.

Avoiding Debt Traps

Financial literacy helps people avoid costly mistakes. Those who have more financial literacy education are more likely to avoid payday loans, which have high interest rates and hidden fees, a 2019 study by a University of Wisconsin-Madison researcher found.

People with greater financial literacy also were less likely to take pawnshop loans, make only the minimum payment on credit cards, or incur late fees on various financial products, the FINRA Investor Education Foundation found.

Another study by researchers at Montana State University found that college students who took mandatory financial education classes were more likely to fund their educations with low-interest federal loans and less likely to carry credit card balances. Those from less wealthy families were less likely to work while enrolled in school, while those from wealthier backgrounds were less likely to take out private loans. 

Better Financial Health

Students who went to high schools where personal finance education was required were less likely to default on their debts and had higher credit scores than their peers, a study by researchers at Montana State University showed.

Knowledge often sticks with students after graduation, giving them an edge on tests of personal finance knowledge, an audit of Utah’s financial literacy program showed. That knowledge then helps them develop better financial habits. Graduates were more likely to be able to cover a $1,000 emergency expense and to have invested in the stock market, and they were less likely to be late on monthly payments.

Why to Start Teaching Financial Literacy Early

Karsten Walker, a retired teacher and learning coordinator at the Alpine School District in Provo, Utah, said there may be other benefits to early financial education not yet captured by the research. He helped establish his district’s financial literacy program that rolled out in the early 2000s, and he said many of his former students have gone on to careers in the field.

“Not only do you help kids with their personal finances, but you’re going to see that kids gravitate to that as a career interest,” Walker said.

Walker said students would probably be even better served by starting to learn about money well before high school.

“While high school is great for financial education, you do need to start earlier,” he said.

And parents are up against what Vince Shorb, CEO of the nonprofit National Financial Educators Council, called “psychological warfare” in the form of toy advertisements, peer pressure, and social media. They are all bombarding children with messages encouraging excessive consumption and a spendthrift attitude. Shorb said high school financial literacy classes are a step in the right direction, but they may not be enough on their own.

“Try speaking a foreign language after one semester of anything,” he said. “Kids in school aren’t really getting anything about money. And parents aren’t training children to be good stewards of money and understand it and develop positive habits from a young age.”

Griffin said developing habits of good money management will likely take more than just one class.

“Money management is largely behavioral. It’s one thing to know the skills, but it’s also highly beneficial to start learning how to apply them into your everyday life,” she said. “It’s kind of like anything with mathematics or reading. You progress as the years go on.”

Tips for Getting Started

There are many ways to get children thinking about money. Shorb offered several tips to prime children for early financial literacy.

• Explain what you’re doing. Parents or guardians can help children understand how household finances work by engaging them in their own finances. Whether it’s a shopping trip or paying the bills, you can walk children through the decisions you’re making. You can also let kids listen in on your conversations with bankers, accountants, and other financial professionals. “Kids are sponges,” Shorb said. “They’re smarter than we think. They’re picking up things that we don’t even understand.”
• Have children earn money with chores. Rather than buying children toys outright, parents can use a classic technique of having the kids earn money by doing chores. That way, they learn the connection between labor and income. Consider having kids put some of their chore money toward household bills as they get older. 
• Get kids into career conversations related to their interests. Earning income is a crucial part of having good finances, and kids model their career interests on jobs that they’ve been exposed to. This explains why so many children want to be teachers or YouTube influencers. Help kids expand their horizons by having them talk to people with other jobs, especially ones related to their interests. For example, if a child is interested in BMX biking, the parent can bring them to a competition and ask a vendor to explain what they do—most people are usually happy to talk to kids.
• Set aside time to teach the fundamentals. Consider sitting kids down and teaching them basic concepts. The lessons should be age-appropriate. For example, the topic of FICO Scores would probably be too advanced for a 4-year-old, but they may understand the concept of borrowing and returning.
  

The Bottom Line

Teaching financial literacy is important to instilling healthy habits in children so they can make the best decisions about money throughout their lives. Start financial lessons at an early age to give them a head start in developing these critical skills, then continue to provide financial guidance on more advanced lessons as they are ready. The strategies you use to foster financial literacy in your child will depend on how your child learns and how you best interact together.