Financial Literacy Begins at Home … and It’s Never Too Early to Start!

Financial Literacy Begins at Home … and It’s Never Too Early to Start!

April 22, 2021

Our kids have books about dancing giraffes, hungry caterpillars, big green monsters, pigeons that drive buses and a million other silly things. Why not get them some books to teach them early money concepts?

In honor of April being Financial Literacy Month and to help jumpstart your child’s learning library, I rounded up my favorite books for 3-8 year olds: 

  • The Berenstain Bears’ Trouble with Money by Stan and Jan Berenstain
  • Just a Piggy Bank by Gina and Mercer Mayer
  • Alexander, Who Used to be Rich Last Sunday by Judith Viorst
  • One Cent, Two Cents, Old Cent, New Cent: All About Money by Bonnie Worth
  • Bunny Money by Rosemary Wells
  • Curious George Saves His Pennies by Margaret & H.A. Rey

These books are a perfect introduction to some early money concepts and are a great way to lay the foundation for your child’s financial education. If you want to play a key role in shaping your children’s feelings, thinking and values about money, you need to start at an early age. Here’s how:

Bring the concept of responsible money management to life.

Introduce coins and cash. Explain what money is and how it used. Children learn by doing, so take them shopping with you and pay with cash. Many of your child’s early interactions with money will involve spending, particularly on items for them. So, it is important to teach them from a young age that money isn’t just for spending, they should be saving regularly too.

Get them a piggy bank or savings jar to help your child get in the habit of saving. Children enjoy adding coins and bills and watching them fill up! In addition, they learn basic math and experience the joy of saving. Start with a short term goal, such as a toy that they really want.

Advance from a piggy bank to a real bank. Children need to have their own money so they can learn how to make decisions about using it. At this stage, consider an allowance or payment for certain chores around the house.

Take it to the next level by teaching them how their money can grow.

Saving money is a great habit.  But if you want your children to learn how to truly build wealth, teach them about investing. You can help your child get started investing by opening a custodial brokerage account or a custodial Roth IRA. Many of you are familiar with or have your own Roth IRA account but did you know that you can set up a Roth IRA for your child? It might not be on their wish list, but parents and grandparents might want to write it in. And for good reason. Roth IRA assets grow tax-deferred for decades, and the income (including earnings) can be withdrawn tax-free in retirement.

Who can set it up? A parent (or any relative) can set up and fund a Roth IRA account. They would serve as a guardian on the Roth IRA for the benefit of the minor child. However, when the minor attains the age of majority, typically 18, ownership of the Roth IRA would revert to the child (as an adult).

No minimum age: There is no minimum age be eligible to establish and contribute to a Roth IRA - all that’s required is reportable earned income. Earned income is defined by the IRS as taxable income and wages such as money earned from a W-2 job.

Contribution limits: The Roth IRA annual contribution limit is $6,000 in 2021, or the total of earned income for the year, whichever is less. If you want to contribute to your child’s Roth IRA or match your child’s contributions, he or she must have as much earned income as the total contribution amount. In other words, a child does not have to use their own hard-earned income to fund a Roth IRA, but they can if they want to. 

Higher Education: Another way a teenager or young adult can use Roth funds is by taking tax- and penalty-free distributions of their Roth IRA contributions (basis) to help offset expenses related to higher education (an exception applies to the 10% early distribution penalty for such expenses).

TIP: Retirement accounts are not considered assets on the Free Application for Federal Student Aid (FAFSA) form, so the value of your Roth IRA won’t lessen your chances for qualifying for financial aid. However, when taking a Roth IRA distribution to pay for college, it may be counted as untaxed income on the FAFSA.

Saving for a House: Roth IRA funds could also help to pay for a first home. If you are an eligible first-time homebuyer, you can withdraw up to $10,000 in earnings from your Roth IRA without the 10% early-withdrawal penalty, even if you’re under 59½. You’ll also avoid a tax bill on that withdrawal if you’ve had a Roth IRA for at least a five-year period. If you don’t meet the five-year test, you will be subject to taxes on $10,000, but not the 10% penalty.

Model Good Financial Behavior

When it comes to money, a lot depends on a child’s maturity, financial literacy, and commitment to saving and investing for their future. The money habits your children learn – and witness in Mom and Dad – could certainly carry over into adulthood. In my household growing up, I was taught the importance of working hard, but crickets when it came to saving. As a teenager, I paid for my own basic expenses such as car insurance and cell phone bill but lived paycheck to paycheck until I graduated college. In hindsight, I most certainly could have saved as well.

Just as important as the lessons you teach your kids about money are the way you discuss and handle money when you are around them. Make sure you model the behaviors around money that you want your children to adopt!

Please don’t hesitate to reach out if I can help or be a resource in your journey of educating your child(ren).




The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.