This article is a collaboration with a person (let’s call him KV) I really respect and someone who has two daughters and has sent one to college and the other one is in high school. He works in corporate America and he wrote the meat and bones of this article. I have merely expanded on his points. I want to thank him for collaborating with me on this article.
When I reflect on my financial journey, one of the first things that strikes me is how I could be in an even better off position than where I am now if I had started earlier in my life. The thought always crosses my mind that with the right coaching and guidance I could have made all the right financial moves starting right out of college. But I was never a financially savvy person and while I have my parents and culture to thank for being more frugal and value driven, I can’t say that I had any exposure or guidance around investing or making financially sound decisions while growing up. Fortunately, thanks to my parents, I got a good education and started making some decent money and had the sense to be financially responsible. When I read about stories of poor money decisions and large amounts of debt amongst Americans, I realize that getting people to learn about personal finances at an early age would set them in a much more positive trajectory – especially for lower income folks. This article from CNBC highlights the point I make and explains why schools need to step up to teach money management/personal finance for children.
But is everything the onus of schools? Or can parents play a role too? I don’t claim to be an expert (I am raising two kids aged 9 and 5 at the time of writing this article and I cannot say I have done a lot so far) but I have been doing a lot of reading and research on this. KV has had the benefit of raising two daughters so he shares below some ideas and thoughts on things we can do as parents. Ultimately, we don’t want our children to look for happiness in wealth, but we hope for them to have a stable life doing things that make them happy and are useful to society. One final comment – neither KV nor I are trying to tell someone how to raise their kids. Parenting is very personal (not dissimilar from personal finance). So, think of this article merely as some ideas to get you thinking. Apply them as you deem appropriate.
The first lesson on money – saving vs spending
Learning to save and delay gratification is the first and most important lesson we can teach children.
Learning how money works can be started as early as 5 to 8 years. While children are getting introduced to numbers and addition in school, money can become a supplementary tool to teach about savings. But it’s important for families to consider taking those concepts about numbers a step further and make the kids have some skin in the game. Families will likely have some very different philosophies on this. Some families like to pay a simple allowance to children. Other families use chores to ‘pay’ their kids. Ultimately whichever way your children ‘earn’ money, the very first and important lesson to teach kids is the concept of saving vs spending. There are studies that show teaching kids to delay gratification by saving money have significant positive impacts on children later in life. The famous marshmallow test (https://jamesclear.com/delayed-gratification) has studied this very closely.
In our household, we have been going back and forth on paying an allowance vs paying our kids for chores. But the one thing that we have kept constant is they have a box which they call the ‘Bank of mom and dad’ and in that box are two envelopes. One envelope says ‘spending’ and the other says ‘saving’. They have it rooted into their brains that when mom or dad gives them any money, 50% of it goes into the savings envelope and 50% goes into the spending envelope. Where did I get the 50% number from? I just pulled that number out of thin air – I am just trying to get them to understand they need to learn to save a chunk of what they earn. Obviously 50% in real life, especially earlier in their career is going to be hard. But the lesson has stuck with them because they understand the idea clearly now – they must spend a lot less than what they earn. But equally important is the idea of delayed gratification. You cannot accumulate all the money overnight. They wait for the savings envelope to grow to a decent amount and use that to buy Pokémon cards or the toy of their choice. This will all evolve as they grow older. I have not gotten very sophisticated on the savings envelope yet. My intent was to pay them interest on it so they understand savings can compound. I have not gotten there yet. Maybe there will be fancier apps or toys to help with that. All that said, in summary, learning to save and delay gratification is probably the first and most important lesson we can teach kids.
Tactile learning
There are several tactile learning methods and you can adjust them by age. It does not have to be in the form of expensive or fancy toys but simple and practical.
Tactile learning simply means teaching kids by physically touching or handling things vs making them listen to a lecture. Tactile learning is a great way to teach children about handling money. Below is a list of tactile learning ideas for teaching children about money. They are not exhaustive but merely to offer some ideas. Some of these ideas work better with slightly older kids who can read and write.
- Teach them to handle and touch dollar bills and coins and count them.
- The physical bank passbook from the banks of yesteryears is a great way to help children understand credits and debits from their account. My kids ‘Bank of mom and dad’ has a simple passbook (it’s more like a sheet of paper :)) that logs all the money that comes in and goes out. My son maintains that faithfully.
- Take them on a field trip to a bank. I know – who goes to a bank these days? Everything is online – but this can get them excited.
- Take them out for shopping – show them how much things cost and as they grow a bit older, have them look at the bill. My 9-year-old son has started noticing a lot of items that tend to attract sales tax and he was quizzing me about it the other day. Last week, I took my son to buy some Pokémon cards with the money he had saved and I had him pay the cashier himself with his cash and collect the change and understand the math.
- Nothing is more fun than playing monopoly with the kids ?
There are several tactile learning methods but remember it does not have to be in the form of expensive or fancy toys but can be practical and simple like what I have laid out above. Recently, KV and I had the good fortune of being judges in a writing competition among middle schoolers called Invest Write (https://www.investwrite.org/) to write about their participation in a stock market game. We were amazed at what a fabulous experience this was for kids at that age and getting them to learn some of the basics of investing. So as you can see, there are many ways to provide experiential learning for children at different age groups.
Lead by example
This is a tough but simple one. It can be tough if you are not someone who is super financially disciplined. But the intent is to let your kids observe good financial habits from mom and dad and learn from that. While my parents never explicitly spent time teaching me financial management, I would observe my mom and dad logging all their expenses each month in a book and reconciling the numbers. I would also see my mom talking about how she would invest in stocks, mutual funds, insurance policies etc. So, while I never really knew what it was all about, I did know they were working hard to invest their money.
As they grow a bit older, KV says it’s good practice to start engaging them in discussions around mortgages, loans, investments etc. Depending on how comfortable you are doing it, you can actually share some of the details with them. I totally understand if some parents feel this might feel inappropriate. So do what you feel comfortable with.
The college financial equation
The final opportunity to provide financial education before you let your kids experience adulthood and strike out on their own is in the decision for paying for college. I have talked about how to save for college in more detail in a separate article (https://moneycanbesimple.com/staging/3873/?p=385). One of my relatives who recently had his son go to college to a top ivy league institution and ended up paying for it entirely said the only thing he would do differently would be to make his son take a loan so he understands the financial burden and implications of the cost of college. He said he would have then paid off the loan for his son after college (without telling him in advance he was going to do so) so he would not be necessarily burdened with the loan but still would have appreciated the costs of college and spent some time thinking about paying it off. Obviously, they had the luxury to be able to afford to do something like that and not everyone can do that – but I can see how that can instill a sense of responsibility among the children. Ultimately, it is important to have the discussion with the children as to how much you can afford and how much you want your children to borrow. Too often, children are allowed to borrow whatever they want, and they pay the price of paying back those loans for years to come. This can likely be the single biggest jump start you can provide to your children as they start their lives by themselves.
Counterpoint
Something that is important to highlight is a debate my wife and I have on this topic. While my wife supports providing financial education for the children, she cautions against making the children too fixated on money and making them too ‘money-minded’, especially at younger ages. Her point is they may be at too impressionable an age where they might get too influenced by some of the money conversations and not appreciate the fact that money is merely a tool and one of many means to have a comfortable life, but not the end itself. Admittedly, I don’t know the secret sauce of the right balance other than keeping her perspective in mind as we try to educate our children. Maybe it’s not a big deal but I feel it’s at least important to consider this counterpoint. This is not to say we avoid all forms of money conversations or financial education for children. But simply to try and maintain a balance.
Concluding comments
I mentioned earlier that parenting is deeply personal and individualized for each family. There is no one-size-fits-all approach. But hopefully this article gave you some food for thought to consider the importance of such financial education at a young age. How you decide to educate your children is up to you. The article offered some ideas – you need to decide what works for your family. Finally, I do want to share a resource that I think is extremely useful. The Choose FI foundation has put together a PreK – 12 curriculum which you can refer to for even more ideas. https://www.choosefifoundation.org/prek12
Thank you for reading and I wish you success in your financial journey.
Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.
