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. “In an ideal world, parents would start talking with their children about money very early on.”
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.
Key Takeaways
- Teaching financial literacy at a younger age helps children develop healthy, lifelong financial habits.
- The main principles of financial literacy include earning, saving, investing, protecting, spending, and borrowing.
- Specific government policies and societal discrimination have fed into the creation of a racial wealth gap, which is important to note when it comes to financial literacy.
- Financial literacy can encourage habits that can help children avoid debt traps later in life.
- Children can form money habits starting as young as age 5.
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U.S. Financial Literacy Gaps
Closing gaps in financial literacy could help close wealth gaps. You’ll often find disparities in financial literacy among different income, racial, and gender groups. For example, Americans quizzed on basic financial concepts by the Federal Reserve Bank of St. Louis generally did better when they had higher household incomes.
Research shows that Black and Latinx people have lower levels of financial literacy than White people because of different socioeconomic statuses, according to a 2020 study from the University of Texas Rio Grande Valley.
Researchers typically use the Big Three or the Big Five quiz of three or five questions when they study financial literacy.
It's important to note that anti-minority and anti-Black policies in the U.S. have systemically led 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. 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.
According to research, women generally have lower levels of financial literacy than men, which can put their financial security at a higher risk. For example, a 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.”
Benefits of Teaching Financial Literacy
People tend to make better financial decisions when they’re armed with knowledge about how money works. That's why a financial education can help close wealth gaps in the U.S. Take what happened with middle schoolers Stockton Carlson and Calvin Lambert in 2021, who were participating in a statewide stock market simulation with their class at Vista Heights Middle School in Saratoga Springs, Utah.
The two students noticed chatter on social media about video game retailer GameStop (GME). The company's shares 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 10 weeks, scoring 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.
These students learned a valuable lesson by taking part in the contest. However, diving in with a stock simulator and getting hands-on experience isn't the only way to teach or improve financial literacy. Below, you'll find 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, according to a report by the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.
Financial literacy is also associated with better retirement planning, a lower tendency to borrow against 401(k)s, and a greater likelihood of stock investing.
Avoiding Debt Traps
Financial literacy helps people avoid costly mistakes. People with 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.
Reasons 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,” according to Walker, who 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.
Research shows that people are getting credit at younger ages, and that financial habits developed in young adulthood tend to stick throughout life. Children form persistent habits with money as young as age 5, a study by researchers at the University of Michigan found.
Parents are up against what Vince Shorb, chief executive officer (CEO) of the nonprofit National Financial Educators Council, called “psychological warfare” in the form of toy advertisem*nts, 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 toys, 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 four-year-old, but they may understand the concept of borrowing and returning.
What Are the 5 Principles of Financial Literacy?
The five principles of financial literacy are: earn, save and invest, protect, spend, and borrow. Focus on understanding your pay and benefits, then develop a budget to save and invest your earnings. Ensure your financial health is protected by, for example, having an emergency savings. Finally, be sure that you are spending wisely and that you borrow responsibly.
What Is the Best Way to Teach Financial Literacy?
The best method for teaching financial literacy is the method that engages the student the most successfully. Each student will have different needs and different ways of learning. Understand how a child absorbs information, then develop the best method for teaching financial literacy based on their responsiveness. Methods can include playing games like Monopoly, engaging in discussions, or providing allowances, among many others.
What Is the First Rule of Financial Literacy?
The first rule of financial literacy is to understand your pay, or your earnings. Understanding your pay includes knowing what benefits are available to you and how you can take advantage of them.
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.
