What’s the best way to teach financial literacy? Or, to reframe the question, how effective is it to teach financial literacy?
There’s a fairly common belief that if we could give kids and adults more information about how to handle money, everything would be okay. By and large, studies have shown that not to be the case. It’s like healthy eating and exercise: We all know we would increase our wellbeing if we did both, yet we often have a lot of trouble actually creating and staying with those healthier habits.
I’m not saying financial literacy is irrelevant. Knowledge is important; but knowledge alone is not enough to change money behaviors. This is because our emotions and beliefs—the money scripts we learn early in life—get in the way.
The majority of our money scripts are formed when we’re young, largely before the age of ten. Studies also show that children even as young as five can start to learn money management skills. So it makes tons of sense to start early to teach money skills to children. Ideally, this can help them form more balanced and functional money scripts.
One useful approach, in my view, is to help them learn through experience. There are a lot of ways to do this; the suggestions here are just a few of the things my wife and I did with our kids.
- It’s not a good idea to tie allowances to doing chores. Just say that the chore is part of helping out, as everyone in the family does. Then give them an allowance—an amount that’s reasonably modest based on your family’s circumstances—and let them use that money for whatever they want.
- Take them shopping for themselves. I remember when my kids were small and their allowance was $5.00 a week. I would take them to a big discount/freight salvage kind of store that had a toy section. Maybe one week they would spend their entire five bucks in a few minutes. Maybe the next week the toy they wanted wasn’t there. Or maybe they wanted something that cost more than their allowance. So they started getting the idea that, if I want the more expensive toy I have to save. They also started learning a bit about comparison shopping. Other times they would buy something cheap, and the thing would break before we got home. So they learned about the tradeoff between price and value.
And what I learned was that it was really important for me to not interject my opinion and to let them learn from their own experience and decisions. Because this is very, very inexpensive learning. It’s better to be making terrible decisions with a few dollars when you’re 6 or 7 than with large amounts when you’re 18 or 20 or even older.
- Give the gift of failure. Giving kids the space to fail is a wonderful lesson. Giving the gift of money to manage needs to include the gift of being able to make mistakes. Which means—and I know this can be hard—to not rescue them when they run out of money, when they’ve spent it all. Maybe in some circumstances, a loan might make sense. You could even help them learn what interest is by having them pay back a little more than they borrow when you deduct the loan from next week’s allowance. But the key is not to make it a gift, not to bail them out and rescue them. Help them to learn that when the money runs out, the money’s gone. That is one of the most important real-life concepts about money that we can teach our kids.
- Let them see you manage money. When you kids shopping with you, for groceries or clothes or whatever, you can help make that a time of learning. Maybe you’re comparing two products and you decide to put one back. You can explain, briefly in a conversational way, why you made that choice. Just verbalizing this as you’re shopping can be extremely helpful to kids. Of course, much of the time they aren’t really going to care and won’t be paying much attention. But at some point in time you’ll have those teaching moments. You may also find years later that they were taking in more than you realized. All of these are basic things, but they can go a long way toward helping a child learn those basic money skills. Children are always learning, including learning the unconscious money scripts that will affect them as adults. Giving them a chance to practice and learn about managing money when they are young can help shape their money beliefs in positive ways and support their financial wellbeing throughout their lives.
Check out The Financial Therapy Podcast by Rick Kahler concerning this topic.