What Kids Should Know About Money At 9, 13, 18 and 23

Kids Financial Lessons

A child occasionally blowing a week's worth of allowance on ringtones or a month's worth on designer jeans may seem like a harmless rite of passage. If the child is really young, you might even think it's cute — and to be fair, such behavior may be both harmless and cute if parents use these kinds of moments as teaching opportunities.
But most parents aren't nearly vigilant enough with their financial guidance and most schools don't teach a thing about money at young ages. So bad habits develop early and may stay with kids for a lifetime. No one should be surprised to see these same children later on buying cars or houses they can't afford and amassing credit-card debt they can't pay off.
What young people don't know about money is sometimes shocking. In a recent national survey testing high school students about basic financial facts, only one in six understood that over the long run stocks should generate higher returns than savings bonds; only one in five understood that the interest paid on a savings account is taxable in most cases. The average score on this financial literacy test was an F — just 48%, which happens to be the worst result in a series of six such tests over the last 11 years.
Even when teachers were asked to test only their brightest students the average score barely budged — to a still-failing 57%. "Kids don't know enough about finance pretty much across the board," says Laura Levine, executive director of JumpStart Coalition, which promotes teen financial literacy. One big problem is that many parents aren't sure how to bring their kids along. Here's a snapshot of what your kids should know about money at four stages of life:


Nine years old

It's never too early to start teaching about money. Well, almost never. I'd skip bedtime readings of Benjamin Graham's The Intelligent Investor while your darling is still in a crib. Financial osmosis doesn't work any more than round-the-clock Mozart will in quest of an infant genius. There are things you can do, though, and I'll get to them. First, some benchmarks: By age 3 or so a child should be identifying coins and by 5 he should know what those coins are worth. By 9, he should be able to make change, read price tags, understand a store's product return policy and know how to make money by selling lemonade or doing extra work. He should understand the difference between wants and needs and how saving will allow him to buy something better later on. He should be able to identify at least one charitable organization and give examples of common household assets like a car or bank account.
Advice: Young kids should receive a weekly allowance of about half their age (in dollars) and along with any birthday money be instructed to keep the money in three separate jars — 60% for immediate spending, 30% for one or two specific longer-term goals like a cell phone upgrade or iPod, and 10% for giving to charitable causes. Let him spend the money anyway he wants within those bounds. This will help teach the difference between short- and long-term goals and predispose him to giving as well. "I often talk to clients who are great savers," says Kelly Campbell, a financial planner at Campbell Wealth Management in Washington DC. "Inevitably it is because their parents started them off with a great savings lesson long ago."

Thirteen years old

Teens spend about $200 billion a year on toys, games, clothing, movies, live events, arcade games and electronics — all forms of immediate gratification that run counter to sound long-term money practices. Your 13-year-old is about to chart a course through this wasteland of spending and would benefit from having a grip on a few core concepts. By now, she should be well acquainted with saving and understand how impulse and peer pressure can set back her longer term goals. She should be able to research products, comparison shop, and make good decisions about what offers the most value. Your budding teen should also be skeptical about advertising claims and familiar with identity theft. She should know how to fill out a job application, be able to set up a personal spending budget, and understand the difference between stocks and bonds and mutual funds. Her three jars should be emptied; the money should be in a bank account with check-writing and ATM card privileges and she should know how to make deposits and withdrawals and track her balance.
Advice: Look for easy ways to teach money lessons. When you shop and pay by credit card explain to her (briefly, please) that the bill will come later — then show her the bill when it comes. While you're at it, show her the lines on your credit card statement for interest expense and late fees and explain why you do or do not have such expenses. Directly deposit a weekly allowance into her bank account and make sure she understands what that money is for — and do not bail her out if she spends too much and has to stay home on Saturday night for lack of cash. Increase her allowance for clothing expense, and let her make the decisions on what to buy. Introduce her to the stock market through low-cost programs like those at sharebuilder.com or mystockdirect.com — and challenge her to a stock-picking contest. "Kids learn best through games," says Lewis Mandell, a leading scholar in the financial education movement at the University of Washington Business School. "The lessons are immediate, fun and real." Kids who play stock market games tend to perform best in financial literacy tests, Mandell says.

Eighteen years old

Here come the college years and very likely your last chance to make any kind of real impression on your child's money habits. He will go off to school (or work) and navigate his finances from here on out pretty much on his own. By now, he should have a credit card in addition to an ATM card and understand all about late fees, interest expense, the importance of paying bills on time and the scourge of making only minimum monthly payments. Young adults are often appalled to learn that a $5,000 balance can take 20 years to pay off through minimum payments. Meanwhile, the card company will reward them with an ever greater credit limit if their payments are on time, and before they know it they have more debt than they can repay. "They shake their head and say, 'Hey, I didn't think I was doing anything wrong,'" notes JumpStart's Levine. Knowing about credit is most essential at this age, and that includes understanding what a credit score is and how to find it and why it's important. But he should also be able to do things like evaluate if financial information is objective and current and use an online calculator to research things like car loans and mortgages. He should understand that student loans must be repaid with interest and have some idea what career he'll be pursuing before loading up on student loans he may never be able to repay.
Advice: Studies show that the single best indicator of future success is a child's willingness to delay gratification. Never stop reinforcing saving for long-term goals and offer to match his long-term savings $1 for every $2 he puts away to mimic saving in a 401(k) plan. If you are still paying him an allowance, do it in bigger, less frequent chunks (monthly or quarterly) so that he has to create and live with a budget. Talk about where the money came from that is in his college fund and what sacrifices were made to put it there and carefully review with him his monthly credit card statements — before he's packed off for campus.


Twenty-three years old

By now your child is pretty much what she will be when it comes to financial know-how. She should understand career choices and how hers will determine her near- and possibly her long-term earnings potential, and understand the consequences of living beyond her means. She should know how to access her credit report, make corrections to it and what actions will boost her score. She'll be coming off of your insurance policies soon and should have an understanding of the various types of life and property policies she'll have to choose from. "Teens think they'll never get sick and live forever," says Levine. She should be able to estimate future annual returns from a stock and bond portfolio (6% to 10%) and inflation rates (2% to 4%). She should be keeping financial records; paying bills online and contributing to a 401(k) plan and know how to dispute a bill or charge. She should understand the advantages of owning versus renting and what types of loans and expenses are tax deductible. In short, she should be an adult.
Advice: The good news is that most college graduates either get this stuff now or soon will. A college education correlates highly with financial literacy, Mandell says. The bad news is that only 27% of the population graduates from a four-year college, which leaves a lot of folks in financial peril. So, yeah, get her through college if you can. Otherwise, the most important thing you can do for your child at this age is cut her off from financial support. That will force her to come to grips with issues she'll be dealing with long after you're gone. Besides, research shows that kids who get taken off their parents' dole in a timely fashion, on average, pull in 20% more lifetime earnings.