There is a general consensus that one of the reasons we make bad money decisions is because we were never taught about money during childhood. Conversely, teaching kids about the value of money can provide them with important skills to navigate adult life.
According to available research, it’s never too early to start (even though it’s not until after age six that kids begin to understand that coins have different values). As one study has found, children under age seven can understand the processes underpinning financial practices, such as counting and exchange.
Another study suggests that, by age seven, children are able to understand how financial exchanges actually work. For instance, they can understand that they don’t have enough money to buy certain games or other things they desire and that to get what they need, they need to find a means to get more money.
According to Dr. Whitebread and Dr. Bingham, researchers at the University of Cambridge, using abstract financial concepts to teach young children about money is likely to be ineffective, because young children have no money of their own and are far too dependent on parents.
The researchers argue that to instill efficient money habits and practices, parents and other significant adults need to use real life situations to educate children about money. Yet another study has found that children learn best from observation, instruction, and practice.
How can you make your child financially literate?
The Stanford marshmallow test – a fairly well-known experiment led by Professor Mischel – used a series of longitudinal experiments in which researchers proposed to several children one reward offered immediately, or two rewards if the children waited for about 15 minutes.
Several years later, the researchers interviewed the same people and found that those who had chosen immediate rewards had been less successful in life, exhibiting poorer educational, health, and social outcomes. Mischel’s studies have now become synonymous with grit and self-control.
Making your child financially literate means teaching him “to resist the marshmallow.” One of the ways you can achieve this is by reducing temptations. Another way is to ensure that the reward proposed is worth waiting for.
Quit hiding behind the “we don’t have the money for this” excuse
Telling your child “we don’t have the money for this” does little to make him financially literate. It’s also a strategy that can backfire: Every time your child has money, she is more likely to spend it immediately because her natural reaction will be “I have the money for this now.”
Rather than tell your child you have no money, explain beforehand what you’re going to buy before you go shopping. Make a shopping list, and make it clear that you’re only going to buy the things on the list and nothing else. If you decide to allow her to get something for herself, be clear about what she has a right to and what price range is acceptable.
Teach by example
If your children see you save money, they will perceive saving as the norm. If you explain why you buy in bulk, or why you don’t always buy brand names, they are more likely to incorporate this “normal behavior” into their own spending habits when they become adults themselves.
A recent study found that children essentially observe and assimilate “values, attitudes, standards, norms, knowledge, and behavior” to understand financial issues. Model what you’d like to see in your child.
Let your child manage money
Letting your child handle some money by giving him an allowance or by paying him for certain tasks can help him develop financial literacy skills. It’s an effective way to teach kids that once money is spent, it’s gone for good. As one study has found, personal economic experiences help children develop their economic reasoning.
Giving your child money can also be an opportunity to teach him about goals. Before giving him money, consider what it will be used for. Will the money be his to use as he sees fit? Will he be expected to take charge of some of the things you previously provided? Is he aware of what is now expected of him?
Incorporate savings from the start
If your child has access to money, incorporating savings from the start helps her learn money saving habits that could last beyond the childhood years.
Each time she receives or earns money, ask her to put away a certain amount for savings and a separate amount she can spend immediately. “Saving for saving’s sake” is a much too abstract concept for kids. Clearly explain what the savings can be used for – a much sought-after toy, a special outing, etc.
Talk about your money decisions
Explain your financial decisions to your child. If you only buy fruits and vegetables in season because they’re cheaper, let your child know. If you’re saving in order to purchase something, talk about it.
Take your child to the bank and explain how banks work. Talk about debt: Why is it important to avoid it? How one can avoid it? Is there “good debt”?
We’d love to hear how you teach your kids about money. Let us know in the comments section.