As a professor of finance, I have spent years interacting with men and women of different ages and professional identities, helping them navigate the intricacies of financial markets as much as clarifying the idiosyncrasies of the investment process. I’ve learned that by working with kids from an early age in nurturing an understanding of the value of money, engaged parents help them develop a future ability to manage it properly.
One element that struck me was a recurrent lack of understanding of the basic foundations of financial literacy. While many had some level of technical knowledge, often they lacked sensible comprehension of the underlying fabric that leads to good long-term financial decisions; an issue seemingly overlooked since the early days of one’s general educational journey.
The importance of financial literacy at an early age resonated with me even more when I worked on developing educational modules on helping wealthy families train the newer generations in dealing with the responsibilities of a significant inheritance. And while very wealthy families undoubtedly face some peculiar issues, the framework of our modules seemed applicable to most families interested in raising financially responsible children.
The first item of debate is when to start a financial education. I think that at some light level, it is never too early. Naturally the process needs to keep into consideration the child’s cognitive ability related to his or her age, however, an early start always seems advantageous.
Many young men and women do not seem to have a good grasp over what money really is. In fact, there is a stunning inverse relationship between the family wealth and the understanding by the next generation of what money is.
By working with kids from an early age in nurturing an understanding of the value of money, engaged parents help them develop a future ability to manage it properly. Starting an allowance program very early in the life of a child should set the right foundations for his/her understanding of the three aspects of money management: spending, saving, and investing.
An allowance program can be used as a tool to improve discipline and decision making as the child will now have to deal with constrictions and parameters. The program can also be modified as contingencies change; for example, the length between cash flows should systematically be increased to improve the kids’ ability to manage their funds over longer periods of time.
The next step should be concerned with training a child in the budgeting process. Integrating allowance management with budgeting can be a powerful cocktail in your children financial education.
The first action we take when we start working with any client, is to require them to work on a very detailed budget. This step occurs regardless of the level of wealth behind the client; budgeting “amnesia” is unfortunately a very common symptom. This is understandable since budgeting can be tedious and generally annoying as, regardless of one’s wealth, it creates limitations. This is why a budgeting discipline needs to be instilled early in young children.
When the kids grow up, more teaching opportunities become available. Making the kids acquainted with the banking system and bank accounts is an obvious starting point. This can be followed by an investment program. In this case, the child can be exposed to the intricacies of capital markets by opening a brokerage account or at least by playing a stock investment simulation game.
Exposure to capital markets also reinforces a spirit of entrepreneurship. While not everyone is built to be an entrepreneur, the sense of responsibility and empowering that comes from running one’s business—even if it may only be a lemonade stand—can have invaluable long term positive influence.
To this point, some families of means go the extra mile of setting up a “family bank” designed to finance well thought out and well-presented projects proposed by the kids. Naturally, large family wealth can facilitate this process but the framework can be scaled down and utilized at different economic levels.
Another interesting tool for educational money management is to engage our children in charitable projects. Choosing a cause and dedicating time and some financial resources to it can have a very positive effect on the child’s ability to strengthen the connection between scarce resources, effort, prioritizing, and results.
One word of caution before embarking on this educational journey comes from psychologist Lee Hausner, author of the book “Children of Paradise.” Dr. Hausner advises parents to take a moment as a first step to examine their own attitude and behaviors in relation to money. Money can be and mean very different things to different people and the way we operate can have great influence in what we teach our children. It is imperative that we as parents do what we say we’ll do and that our messages be clear and healthy. Dr. Hausner suggests husband and wife start a self-discovery process where each asks direct questions on their past and present money models. This action should improve convergence of intent between the two parents and it should help clean up attitudes toward money that may have gotten polluted over the years by past experiences or wrong teachings.
Dr. Hausner also stresses the results of many studies that point to two main elements as pillars of a fulfilling life: love and meaningful work.
Regrettably, at Thalassa Capital we are not qualified to advise on love but we believe that the self-respect and discipline that will come naturally to a child properly trained in financial matters might also help in nurturing more loving relationships with others. On meaningful work, we are again in complete agreement with the mentioned studies. From a financial literacy perspective, parents should stress the importance of pursuing meaning via work and simultaneously stressing the link between work and money. The mutually beneficial relationship between doing something that one loves and the remuneration that comes from it should go a long way toward improving our children’s happiness.
- Hausner, Lee, “Children of Paradise”
- Godfrey, Jolene, “Raising Financially Fit Kids”
- Kobliner, Beth, “Get a Financial Life in Your Twenties and Thirties”
Feel free to call us should you want to explore this theme in more details.