When my daughter first asked me about investing, I was shaking in my boots. Who was I to advise her on investing? I sold Apple at 160 after tripling my money. Then it proceeded to 10x its value. I held on to Spectrasite Holdings until the bitter end. Don’t remember Spectrasite? That’s ok. Nobody does.
The point — I’m not an investing expert.
Jason Zweig, the Intelligent Investor from The Wall Street Journal, writes in Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich: “Unlike other animals, humans believe we’re smart enough to forecast the future even when we have been explicitly told that it is unpredictable.” Zweig points out the simple fact that most of us are “intuitively poor investors.”
So how can we possibly help our kids begin to get a grasp on investing?
Share Your Money Mistakes — Conversation Matters
I believe it’s key to recognize past failures in handling our own money, learning from those mistakes and passing that information on to our kids. I explained to my daughter that because her mother and I weren’t stock market experts, we were now largely in index funds. But if she were interested in buying a stock, which she was, then I could help her do that.
She decided to buy Adidas because she was aware of — and liked — the brand. Though “buy what you know” isn’t necessarily the best advice, the point was to support her interest (and to keep the financial exposure low).
The three shares happened to increase markedly in a short period of time. This opened up conversations we never would have had if I’d discouraged her from buying stock:
- We discussed short-term versus long-term capital gains
- Baselines (Sure, your stock is rising, but so is the whole market.)
- Risk (Waiting might save you capital gains, but those gains could go kaput!)
Had I or any other teacher sat her down to explain these concepts without this experiential learning, her eyes would have likely glazed over. Remember this important corollary to the point about sharing your mistakes — be wary of eye glaze!
This example underscores a key theme of this post — we should be willing and able to engage in an ongoing conversation with our kids about money.
Though the conversation above was too advanced for a toddler, parents can and should begin a lifelong open dialogue about money with their children before they enter kindergarten.
Through a combination of first-hand experience and education, parents can teach financial literacy to their kids and in the process raise money-smart and, eventually, money-empowered children.
What Is Financial Literacy?
Let’s start with a basic definition of financial literacy. After reviewing the literature on the subject, I think the following captures it fairly well:
Financial literacy is our ability to understand how to use money as a tool to help us craft successful lives by the standards that matter to us.
There are a lot of monetary topics wrapped up in this statement that are important to understand — credit and debt management, insurance, investing and even entrepreneurship. These subjects are outlined below in “The Twelve Jump$tart Coalition Financial Literacy Principles” section.
“We conclude that lack of money brings both emotional misery and low life evaluation.”— Daniel Kahneman (Nobel Prize winner) and Angus Deaton
Money may not be the driving factor in your success. However, as pointed out by Kahneman and Deaton above, unless you plan to go full caveman — a hunting, gathering, grid-eschewing Luddite — you’ll need some of it to live the life you want.
You can take this short FINRA test if you’d like to gauge your financial literacy expertise.
These important trends — detailed in this article — underscore the importance of financial literacy today:
- We are living longer.
- We are the stewards of our own retirement.
- There are many, many choices and options.
- We can’t rely on government aid.
The Basic Financial Literacy Skills
There are so many choices of how to safeguard and invest our money. Though this realization may seem overwhelming, financial literacy begins with basic skills that can and should be taught to our children at a young age. In my book The Art of Allowance, I identify the following three core money-smart skills that kids can begin learning early:
- Distinguishing between needs and wants
- Making smart money choices
- Setting and saving for goals
These basic skills provide a framework for a financial literacy learning program you can easily establish. Every family will approach these conversations differently, and no matter where you are as a parent on your own money-smart journey — either a profligate spender or a born saver — you can teach these principles.
You may need to adjust some of your own behaviors (like this reformed spender did), but make that part of the challenge. I discovered that when we learn from our own experiences and embrace our mistakes, we can craft a useful program for our kids. Many parents have also found that during the process of teaching their own children, they learn a lot about themselves and make adjustments to how they manage their own money.
You will work together with your children as they grow along with your program. Teenagers will move from a basic allowance to one more suitable for children traveling towards adulthood with the increased responsibility of handling their own affairs.
As your children grow older, they will begin to appreciate the experience of learning more from you. Some of this teaching might be easy. Some not so much. Jump$tart Coalition, a wonderful national non-profit that promotes financial literacy for kids in kindergarten through the end of high school, identifies twelve principles your kids will have to learn to become financially literate young adults.
- Developing Short- and Long-Term Goals
- Making Savings a Habit
- Consumer Protection and ID Theft
- Credit and Credit Scores
- Understanding Financial Institutions
- Money Management and Financial Independence
- Smart Shopping
- Understanding Credit and Debt
- Planning and Budgeting
Of course, you might look at this list and think, “That was quite a jump! Consumer protection? Insurance? Financial independence?”
It is quite a leap, but it’s important to introduce these principles in an age-appropriate fashion. Your kids will move towards financial independence (for themselves and from you) as they age. They will become earners in their own right with, for example, summer jobs and babysitting. It happens fairly quickly and underscores the importance of beginning your financial literacy education program at a young age.
Research gives us some clues as to when to introduce these principles so that youngsters can begin to develop the skills necessary to deal with them.
Why Financial Literacy Education Should Begin Early
Kids become aware of money from a very young age. It typically starts with witnessing transactions, media exposure and the inevitable desire for stuff.
Emergent Financial Literacy
We read to our kids before they can read and write because this provides the foundation for these skills. This growth period is called emergent literacy.
In the same way, we must introduce our kids to the language of money as soon as they become aware of it — usually when they are toddlers. During this period of emergent financial literacy, we’re not asking them to save for goals or to make smart money choices. Heck, they may still think a penny is worth money than a dime because it’s larger.
Research Makes a Strong Case that Financial Literacy Learning Starts Early
“Better they learn from their mistakes when the dollar amount is small than later when mistakes are more costly.”— Marsha A. Goetting, MSU Extension Family Economics Specialist
From a research standpoint, “executive function” develops quickly in the 3- to 5-year-old brain. Executive function involves three key components: inhibition (ignoring temptation), cognitive flexibility (problem-solving) and working memory (processing multiple items). These elements’ working together is important in developing key life skills like reading and writing, and they play a part in school readiness.
In the financial literacy arena, executive function helps us to make financial choices, stave off consumption desires and stay focused on longer-term saving goals (delayed gratification). Executive function is negatively affected by poverty and stress, with the former featuring an insidious type of the latter called “toxic stress,” something I discussed with researcher Chuck Kalish on one my podcasts.
Parents teach their kids about money through what researchers call “financial socialization.” This includes direct instruction (“Let’s discuss compound interest.”), observation of parental behavior and experiential learning with a program like an allowance.
As children’s understanding of money matures, they are able to learn about savings, frugality, and financial planning, often by observing the behaviors modeled by parents and other adults. Perhaps not surprisingly, research suggests that active parental engagement around financial issues, including communicating the importance of saving and providing opportunities for youth to practice making simple financial decisions, is highly beneficial.— Drever et al., “Foundations of Financial Well-Being”
Financial Literacy Education in the Schools is Lacking
An astonishing 86 percent of Americans believe that financial education classes should be mandatory for K-12 schools nationwide.— Country Financial survey
Despite what many parents would like, financial literacy education is dependent on the state. Most states do not offer financial literacy classes, let alone require them for graduation. While there is some debate about these numbers, the latest Survey of the States revealed the following:
- Only 17 states require a high school course in personal finance.
- There has been no change in the number of states including personal finance in K-12 standards since 2016.
- Only 22 states require high school students to take a course in economics.
- Since 2014, there has been no change in the number of states requiring standardized testing of economic concepts.
What’s happening in your local schools? Even if you’re fortunate to live in a state that requires financial literacy education, be mindful that those classes likely won’t give your children the experiential learning that research strongly suggests they need to become money-smart.
If you’re interested in learning about improving financial literacy in your local schools, then you should explore Jump$tart’s “Check Your School” campaign.
How to Get Started Teaching Financial Literacy to Your Kids
An allowance is a good way to give your kids an important real-world experience in handling money wisely. It provides them with opportunities for experiential learning, which research notes is a core component of financial literacy learning.
I discussed in my podcast conversation with Ashley LeBaron, co-author of the paper “Practice Makes Perfect: Experiential Learning as a Method for Financial Socialization,” that financial education without a real-world component is an abstraction. As is the case with any skill — from playing kickball to neurosurgery — practice is required for its development.
Making Mistakes Is the Point
Parents worry that kids may make mistakes with money. That’s the point. The difference is that they’ll commit these errors in much lower-stakes environments than they will if their first experiences with money are upon receiving their first paychecks.
A Conduit for Conversations
“It’s not about the money. It is about the conversation. The money is the tool to generate the conversation to have with your kids.”— Evan Wilson of The Money Jar Podcast
As noted early in this post, being open to helping my daughter understand investing prompted numerous conversations that we either wouldn’t have had or to which she wouldn’t have been very receptive.
Starting an allowance is a conduit to an ongoing dialogue with your kids. Rather than pontificating about the importance of giving, you can set up a Share jar for charitable donations and have her set aside a portion of her allowance for this purpose.
When your child nags you about getting a new laptop, you can talk to her about how she can use her allowance to save for one and in the process learn the power of setting goals, visualizing them and working towards their achievement. Powerful life lessons.
As Bill Dwight, the FamZoo Chief Dad points out, it’s important that parents use the allowance purposefully. An allowance given as a handout — without parental direction — is unlikely to yield results, just as handing a child a tennis racket without some guidance is unlikely to land them at Wimbledon.
If you’re interested in how to use a purposeful allowance to begin financial literacy education with your children, then this is a good place to start.
You Can Start Teaching Your Child About Financial Literacy Today
Every parent can and should take an active role in teaching kids financial literacy. Even if the schools are helping them learn about managing their money, kids still need practice time with it.
Fortunately, you don’t have to be an expert to raise a money-smart kid. By starting early with an allowance and opening up an ongoing dialogue with your child, you can help her become money-empowered.
We can and must work together to raise a generation of money-smart, money-empowered kids who are financially literate.