In the last chapter of the book currently known as Plenty, I’m writing a small section on teaching kids about money. I’ve realized from a quick look around that people have very definite opinions on this… and very little of it is backed up by research.
It’s a microcosm of many of our broader debates on behavior and economics. Giving kids a regular allowance sounds like a good thing, so they can start to learn to manage their own money. Teaching high schoolers financial literacy sounds like a good thing. Isn’t more education always better?
But when you actually test these things, and look at people’s later financial behavior, the situation becomes more muddled. This article from a 2006 issue of Money explains the problems nicely. Large scale studies of high schoolers who have taken financial literacy classes do not find that these kids score better on financial literacy tests. They were just as likely to carry a credit card balance and bounce checks. Kids given an allowance were less likely to describe themselves as good savers later on than kids who hadn’t gotten an allowance. Instead of teaching kids to be good stewards of money, perhaps an allowance teaches kids that there will always be another paycheck coming…so why save?
Obviously, people are way too complicated to have any one parental input lead to any given outcome. We also have different personalities. I know perfectly well how the stock market works but I just don’t find it very interesting. Some kids who grow up in limited circumstances and later have higher incomes squirrel it all away. Others believe life is not worth living without 10 Jaguars in the garage. But hunting through the literature, I think there are a few things that may matter.
First, children watch their parents from a very early age and pick up habits this way. If you always pay your bills on time, spend less than you make and save regularly, these become established as cultural norms. Second, it is also very hard to break habits. If you start your kids saving early on by setting up an account where they are expected to put some of the birthday and Christmas money that comes in, this will become a norm as well.
How are you teaching your kids about money? Do you give an allowance? For those with grown up children, do you think anything you did had a particular impact?
6 thoughts on “How Do You Teach Kids About Money?”
I don’t have any kids yet, but one thing my parents did with me (similar to what you wrote above) was required us to put 50% of all holiday/birthday/gift money into a savings account until we reached college. I actually had about $5K saved up in that account when I turned 17 and was able to buy my own first car (in cash!) It’s definitely something that I’ll do with my kids.
Something else i’ve been thinking about is once my kids are in high school and working part time we’ll have them put 10% of their earnings in an IRA… can’t start too early with the power of compounding interest!
I didn’t hide the finances from our kids. And I told them that while we weren’t rich and couldn’t afford everything we wanted, we COULD afford what we chose to afford. I stressed the importance of choosing what you afford, and tried to teach how to make those choices.
They knew what I made… what he made… what things cost. If they asked for things, they would hear why we could or couldn’t afford them. I discussed their grandmother’s financial issues with them after I helped her with things… explained things she did that were errors. When I’d get a loan, I would explain why I chose the one that I did (terms, interest rate, etc). I’d give them a small amount of money when we went shopping, and they could buy things at regular stores, resale shops, or garage sales, and see just how far their money did (or didn’t) go.
They were always told that they were expected to pay for their own college. They were given allowances at times when we could afford it, and half of that allowance was put into their college savings. Half of their income from summer jobs also went into college savings. When I helped the oldest get his college loan (and co-signed for it), I discussed the terms of various loan options, and the benefits and drawbacks of each loan, and let him choose which he felt was the best one.
I think keeping them in the loop… letting them REALLY see YOUR finances, as much as they are capable of comprehending, and explaining everything you possibly can… shows them how finances work. And if you have a good method, they are likely to follow your model.
It seems kids do get it from the parents. And adults of today got it from their parents. There is some research to back this up I think. The children of millionaires are notably bad in this area (b/c their parents dote on them) but most millionaires themselves according to that book The Millionaire Next Door, are the children of poor,hard-working — and FRUGAL, in many cases immigrants, and the idea is that many millionaires are very very frugal b/c their parents were frugal. The funny flip side of that is though that most children of millionaires are NOT frugal and being a millionaire does not usually last more than one or two generations… so I guess not everything is gotten from the parents, only what the parents choose to teach. I think scarcity and the psychology of frugality has different affects on kids and the children of the very wealthy are often not aware of limits, which can be bad. That said, a mentality of not enough can keep kids from taking risks or spending money when it is required to do so.
@Cara- from my reading of millionaire next door, it wasn’t quite as clear as all that. The authors liked to stress the number that were buying used cars, but they weren’t all buying used cars. I’ll go back through and see if I can find any break down on the kids, but my take-away from that book is that it was as much morality tale as anything else…
I am not sure what you will think about how my parents taught me about money.
My dad owned his own small business and when I was 16 he made me bookkeeper, both for the remodeling business and for our family’s personal finances. This process consisted of giving me about an hour’s worth of instruction and then placing me more or less in charge. Every so often he’d check over the accounts and yell at me when he caught mistakes. I guess this was assuming strength rather than fragility, “Tiger Mom” style. 😛
Needless to say, this method cost him some money and both of us a lot of headaches. For awhile I decided I was awful with numbers and hated accounting, but over time I mastered the program we used (Quickbooks), mostly through trial and error, and developed a pretty good understanding of personal and small business money management. I knew more about our family finances than my mother did. As my confidence and skill grew, it became an even enjoyable task. I kept up this “job” for my parents until I married at age 23.
Perhaps it was an unconventional way of learning about money, but looking back, it was definitely experience worth having! It’s all grist for the mill, as they say.
@Leah – well, it seemed to work! Your father had quite a bit of faith in you to put you in charge of the numbers at age 16. I’m not sure I would have been so trusting, but I suppose that putting a kid in charge of all family bills could have some real merit.