Saving and Investing

Financial literacy for kids

This article will walk you through what financial literacy is, why financial literacy is important, how you can teach your teen financial skills, and how to invest for kids.


EarlyBird Team

Last updated:

February 13, 2023

EarlyBird helps parents, family, and friends collectively invest in a child’s financial future. Learn more.

What You'll Learn

One of the greatest gifts you can give the children in your life is financial freedom. 

If you invest in your kids now, you should be able to generate savings and income over the next few years to kickstart their progression to adulthood with enough assets to chase their dreams. 

But investing in your child’s future isn’t just about saving pennies and squirreling away a bunch of stock shares in big companies. 

You’ve also got to teach your child how to manage those assets responsibly. Otherwise, you may just end up watching an over-excited 18-year-old toss away thousands of dollars on the latest get-rich-quick scheme.

That’s why you should be thinking now about how to teach your child the main components of financial literacy, the basics of investing, and the tools they can use to manage money sensibly. 

Fortunately, there are plenty of amazing methods, resources, and solutions available to help you pass on your personal finance knowledge to the most important people in your life.

This article will walk you through what financial literacy is, why financial literacy is important, how you can teach your teen financial skills, and how to invest for kids.


What is financial literacy and why is it important?

We hear about financial literacy all the time - but what exactly is it?

Simply put, financial literacy is the basic knowledge that we all need in order to make important financial decisions. It can help with decisions on budgets, debt, and investing.

What sort of skills and knowledge are we talking about, here? Financial literacy includes every financial life skill from understanding how a checking account works and what using a credit card means, to balancing a budget, how to use an IRA or 401(k), investing in the stock market, and more.

At first glance, you might be wondering why on earth your 10-year-old should know what a 401(k) is. But the truth is, all of this stuff is really important. 

Financial literacy includes all the day-to-day choices you’ve got to make when trying to balance a budget, buy a home, fund a child’s education, and ensure you’ve got some sort of income at retirement. What’s more, research suggests you don’t have a whole lot of time to sow the seeds of financial literacy in your kid’s headspace.

Children generally have their financial habits set by the age of seven. That means to set your kids up for financial independence you’ve got to teach them the basics of financial literacy (sooner rather than later).

Not only will you instill good habits early, but you’ll also be setting them up for success in the future.

Unfortunately, the numbers tell us that most American families aren’t doing a super great job at teaching financial literacy. 

According to recent survey data, 19% of Americans reported that their household spent more than their income over the past year. Add in the fact that 43% of adults say they haven’t got a rainy day fund, and that means huge chunks of our society simply aren’t prepared to face financial hurdles.

Without knowing how to live within your means, budget, and save, your kids are going to be totally unprepared if they ever get hit by a financial fastball. That’s why you’ve really got to pay attention to this stuff.

By teaching the kids in your life about financial literacy early on, they’ll be able to make smart investment choices and knock that fastball right out of the park.

How do you teach kids financial literacy?

It’s one thing to understand how important it is to teach children financial literacy. It’s another thing entirely to try and capture their imagination in such a way that those lessons actually stick.

Only 27% of kids say they enjoy learning about money management in school. 

That’s totally understandable, because there are some investing topics that are kind of difficult for kids (or even adults, for that matter) to grasp as part of a dry lesson plan.

But, if you’re creative and patient about how you pass those lessons on, teaching the children in your life about financial responsibility doesn’t have to be boring or confusing. In fact, it can be fun and incredibly rewarding. 

The key is to start early and focus on the basics: save, budget, and invest.

Invest for kids from a young age

One of the best ways for you to teach the kids in your life about money is to start investing for them as early as you possibly can. Start putting away a little and often, and you’ll be gobsmacked by how much you’ll have been able to generate by the time your young children come of age.

There are plenty of tools you can use to save and invest for your child, and one of the most flexible tools worth checking out is the custodial account.

A custodial account is an account maintained by a legal custodian (you) behalf of a beneficiary (your child). There are a couple different kinds of custodial accounts: Uniform Gift to Minors Act (UGMA) accounts and Uniform Transfers to Minors Act (UTMA) accounts. 

Because UTMA accounts aren’t available in every state, we’ll stick with UGMA accounts and how they can be used to teach your kids financial literacy.

With a custodial account, you’ll be able to save for your child in a relatively risk-controlled way. That’s because UGMA custodial accounts not only let you store cash for your child’s future, but they also allow you to store different types of assets like company stocks. 

But don’t worry, one of the few things that UGMAs don’t allow is for you to toss in high-risk investments like futures or derivatives. Although these investment types can be high-reward, they’re also high-risk. 

And you don’t want to play with your kid’s future, right?

That’s why UGMAs focus on the investment of relatively safe assets that can grow alongside your child.

With a UGMA custodial account, you can collect as many assets as you’d like to contribute to your child’s future. When they reach a certain age, you can then start to teach them a lesson about those investments, how they generate income through compound interest, and which types of investments or assets would be worth adding into their asset mix.

As a result, your child will be able to learn by doing (with you safely at the helm). With real money at stake, you’ll be able to capture their attention in a way that learning games or textbooks never could. 

After all, they’re watching the opportunities in their life grow alongside your investment for them. 

What could be more exciting than that?

Teach your children how to budget

Budgeting can be difficult at the best of times — but the sad truth is that a lot of us simply aren’t very good at it.

One in five of us are regularly spending more than the income our household is bringing in (not including the purchase of a new home, car, or other big investment). 

Worse yet, 23% of Americans report having medical bills that are past due. No matter where you sit on the spectrum, there’s not a lot of expenses more important than medical bills. That means there are a whole lot of people who aren’t balancing monthly income or saving. 

Translation: if they aren’t already, about a quarter of Americans may soon find themselves struggling to make ends meet. On top of that, overdue medical debt can further compound a household’s ability to meet other monthly financial obligations.

You don’t want your children to be one of these statistics. That’s why you’ve got to teach them how to budget early. 

This might incorporate including them in completing your family’s monthly budget, or encouraging them to spell out how they plan to spend their monthly allowance.

By learning how to budget, your kids will learn fast that money doesn’t grow on trees — and you’ve got to make tough decisions about where to spend and invest cash in order to make it go further (or better yet, make it grow).

Get your kids to set a financial goal

We’ve all got dreams, and the children in your life are no different. That’s why a fantastic way to engage them with financial literacy is to encourage them to set financial goals. 

Maybe they want to travel the world, fund a college degree, buy a house, start a business or something totally different. 

Either way, you should be doing your best to encourage that dreaming. But, more importantly, you’ve got to show them first-hand how putting money away can turn those dreams into a reality. 

The longer your kids devote to an investment, the better their potential year-on-year compound growth of reinvested returns will be. Sit down with your kids and talk about what they want to achieve, a timeline they’d like to stick to, and a ballpark estimate of the resources they’ll need.

Then, do some research with your kids and help them explore different financial and investment options that could make those goals come to fruition.

You’ll be able to inspire your kids to chase their dreams by showing them how the assets you’re investing in now will fund their future a few years down the line.

How can you teach kids about investing?

There are plenty of great investment vehicles you can use to invest for your children and teach them about financial literacy along the way. 

Each investment tool has its own set of pros and cons, so it’s always worth doing your homework before taking on a new investment (especially if you’re going to get your kids involved).

Here are a few of the most common investment vehicles parents and relatives use to save for the kids in their lives:

Custodial accounts

A UGMA custodial account allows a parent, guardian, other family members or even friends to open up an investing account for a child.

Here’s how it works: first, an adult (or “custodian”) sets up the account. Then, that adult deposits and manages the money and investments until the minor reaches the “age of majority.” 

That age is usually 18 or 21, depending on the state you’re living in.

The money in a custodial account becomes the child’s property when they come of age.

An important feature to bear in mind about UGMAs is that the assets deposited into a custodial account cannot be taken back or given to someone else. 

That can be incredibly helpful if you or others in your family historically have trouble saving — because your child’s future funds are safe from everybody (including you).

So, why should you use a custodial account? Simply put, they’re a fantastic way to build up a pool of assets for a child’s future and teach them how those assets work before they come of age.

529 Plans

A 529 plan is a college savings plan that lets parents (or other relatives) fund their children's future college expenses. The important lesson here is that it’s specifically designed for educational expenses. That means a 529 plan restricts your child on how they spend the money that you or another loved one has saved for them.

All of the assets that you place into a 529 plan can only be used for “qualified educational expenses” that are required for enrollment or attendance at an eligible college or university.

For reference, a qualified expense generally means tuition fees, books and course-related supplies. 

Sometimes, a 529 plan can also be used to pay for things like room and board. But you should bear in mind that not all states or service providers allow you to use 529 assets for accommodation, and some plans may be limited to university-managed accommodation.

Translation: if you rely on a 529 to help fund your young person's college living expenses, they’re probably going to get stuck in the dorms.

Another important aspect of the 529 is that post-tax cash placed in a 529 plan typically accumulates on a tax-deferred basis and distributions are tax-free as long as they're being spent on qualified higher education expenses.

Before you start jumping for joy at the prospect of setting up a 529, let’s zoom out here for a bit of context. 

A 529 is a great option if you want to save tax-free for your child’s future, but there are some downsides you should bear in mind. 

Unlike custodial accounts, 529 plans can only be used for certain higher education expenses. Plus, your children might grow up and decide college isn’t actually for them. That totally defeats the purpose of saving in a 529.

Finally, you should know that 529 plans have also got contribution limits. If you’re after flexibility and want to give your kid the freedom to use their money however they want, a 529 plan might not be the best option.

Roth IRA

A Roth IRA is a tax-beneficial account that lets you store long-term savings. 

All the contributions that you make into a Roth IRA are after-tax, which means any contributions you want to take out are then tax-free at the point of withdrawal.

The benefit of the Roth IRA is that it isn’t education-specific. 

That means you’re enjoying the same tax-free withdrawal benefits of the 529 or the Coverdell Education Savings Account (ESA), but you can take out the money you contributed for whatever you want or repurpose the account after your child gets through college. 

The major con of using a Roth IRA for college is that it’s hard to make withdrawals, and there are usually lower contribution limits than state-backed 529 plans. 

In 2020, the IRS imposed a Roth IRA contribution limit of just $6,000 per year (or $7,000 per year if you’re over 50).

So, while a Roth IRA allows you to invest for your kids, it’s important to note that the low contribution limits also mean you’re going to be pretty limited in how much you’re able to save for your children by the time they come of age. 

Another con is that, unless you’re 59-and-a-half years old, you can only take out contributions tax free. Earnings are still subject to income tax.

Long story, short: if you’re planning on putting away small amounts of money, a Roth IRA could be a good move. But if you want to save more than $6,000 a year for your child’s future, a Roth IRA might not be the best option.


Learning about finance isn’t always fun for kids. But it certainly is important. That’s why you’ve got to start investing for your kids now, and encourage them to get involved so that you can teach them the crucial financial literacy skills that will help them march into adulthood with the knowledge they need to succeed.

By investing early and getting them to budget and set investment goals, you’ll inspire your children to take an interest in their financial future. And by choosing an investment vehicle in which your child can participate in a safe and controlled way, you’ll be able to demonstrate to them first-hand how assets work.

If you want to maximize your child's savings potential and give them that financial freedom, EarlyBird's UGMA custodial account is a total game-changer.

EarlyBird is the industry's first-ever account that allows multiple donors to gift assets into an account.

That means your parents, siblings, cousins, friends, neighbors, or anybody else can fund your child's future with just a few quick swipes.

Contributing to an EarlyBird custodial account is as fast and simple as paying somebody on Venmo or ordering food on UberEats. But instead of sorting dinner, you're sorting a child's future.

Ready to give your loved one a gift that leaves a lasting impression? Download the EarlyBird app today.


This page contains general information and does not contain financial advice. All investments involve risk. Any hypothetical performance shown is for illustrative purposes only. Actual investment performance may be different for many reasons, including, but not limited to, market fluctuations, time horizon, taxes, and fees. Please consult a qualified financial advisor and/or tax professional for investment guidance.


EarlyBird Team

Was this helpful?

Download EarlyBird today and start investing in your child’s tomorrow.
Get started with your first $10 on us, when you create an account today!
Download EarlyBird today and start investing in your child’s tomorrow.
Get started with your first $10 on us, when you create an account today!
Download EarlyBird today and start investing in your child’s tomorrow.
Get started with your first $10 on us, when you create an account today!
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
Download EarlyBird today and start investing in your child’s tomorrow.
Stay in the loop

Join the EarlyBird Newsletter!