Did you have a toy cash register as a toddler? It just might have set you on the course to being a financially capable adult.
In its just released Building Blocks report, the Consumer Financial Protection Board explores how to prepare kids for financial capability as adults. It identifies three stages of financial capability development. Embrace these chances to start kids on the right path to turning into money-smart adults. Believe it or not, it all starts with make-believe play at age 3.
Preschoolers. For children ages 3 to 5, the focus is on developing executive function (a sense of control you draw on later in life to set goals, save for the future and stick to a budget) through make-believe play. Encourage your kids to pretend to go to the bank, make a grocery list and go shopping in your pantry. Set up a dressmaking studio. Play accountant. (When I brought my baby to work one day, then-Forbes-editor William Baldwin spotted the board book in her stroller and asked, “Why not give her a calculator to play with?”)
Read personal finance books at bedtime. Really. See if your library has a Money as You Grow book club or start one. The CFPB has a list of picture books (and reading guides) with money lessons, like the classic A Chair For My Mother by Vera Williams. Preschoolers can grasp concepts like people use money to buy things, people earn money by working and people save money over time to buy things later.
Pre-teens. The second money development phase, at ages 6 to 12, goes beyond these basis lessons. Parents and caregivers can help instill positive financial habits and norms in pre-teens. For example, when pre-teens get an allowance or money as a gift, adults can tell them they must save a portion of it. It’s also the time to let them have some input on the family’s spending decisions—always take a shopping list to the grocery store and discuss impulse buys (like the bag of Cookie Chips they throw into the cart).
Try online games and activities like the Federal Trade Commission’s Admongo or PBS’ Don’t Buy It to learn about advertising tricks and setting goals for what you need versus what you want. “As children have more firsthand experiences with acquiring, spending and perhaps even saving small amounts of money, they begin to develop their sense of what is normal or appropriate in money management,” the report says.
Teenagers and up. The third step to financial capability is a focus on financial knowledge and decision-making skills. At ages 13 and up, children can learn from actual experiences. All your family activities can be opportunities to discuss money habits—fueling the car, eating out, even paying bills. At this point, getting an allowance and guidance on how to use it is key as it gives teens confidence in their ability to make spending decisions. By contrast, the report says that teens who don’t get the opportunity to make spending decisions “may feel unprepared or nervous about money. Teens who stay on that cascade or pathway may grow up thinking they are bad with money, or they might habitually avoid making money decisions.”
It’s not just parents, but educators and policymakers who the CFPB says needs to take on the challenge of teaching kids personal finance. Only 17 states require high school students to take a personal finance course in order to graduate , but those who do have improved credit scores and are less likely to face delinquency later in life, said Richard Cordray, executive director of the CFPB at a town hall in Texas, introducing the report. Another promising program to look for is if your local credit union or bank hosts a “reality fair” or “reality day” for high schoolers where they do mock finance activities.