We work with families. In some cases, three and even four generations. We love that aspect of our work and we’re often asked about ways to improve financial literacy for young people. Our experience and recent research show that a good understanding of math and regular, excellent family financial communication go a long way.
43 states currently require personal-finance classes to be taught in high school. These classes are intended to produce good long-term financial behavior. Typically, the kids are taught financial facts and strategies long before they even need it. Furthermore, recent studies, including those by Harvard professor Shawn Cole have shown that that these finance classes are not working and there “is virtually no effect of (high school) financial education on (future) behavior.”
However, studies have shown that math has an impact on students’ financial outcomes. Students required to take more math classes ultimately practiced better fiscal responsibility than other students as young adults. This included a greater percentage of investment income as part of their total income and lower rates of home foreclosure and credit-card delinquency. Charlie Wells of the WSJ recently put it this way: “Focus on teaching math-not money.”
Without strong math skills, people tend to use more emotion in their investing, spending and saving patterns. Further, people with less math experience don’t easily understand the concepts and benefits of basic long-term strategies such as exponential growth and compounding. Studies show that people that are comfortable with numbers and making numeric comparisons make better financial decisions.
The other big key is that financial education should begin at home. Unfortunately, that is easier said than done. In fact, a research professor at North Carolina State University has found “parents talk more about sex with their children than they do about money.” Parents need to have a process to include the children in family financial discussions.
Here’s how one family did it. Scott Parker of Encinitas, CA, stopped by his local bank and withdrew his entire monthly salary in cash. In singles. It took 24 hours for the tellers to put his $10,000 request in stacks and bags. At dinner that night, he dumped the money on the kitchen table.
It certainly got the kids’ attention. Parker’s 15 yr. old son initially thought Dad had robbed a bank. After a pause, Mr. Parker and his wife then went through the expenses, taking money off the table for each one. Taxes, house payment, food, car payments, soccer, scouting, tithe for church, hamburger night and everything else. By the end, there wasn’t much left on the table.
This type of exercise is a great example of communicating with your family. Initiate them early, even at 4 or 5, and keep communicating as they grow. Shielding children from the realities of everyday financial life makes little sense, particularly given the financial responsibilities their generation will face.
Communication helps solve a major problem for children. Money is a source of mystery to them. They sense its power and ask many questions: “Why isn’t our house as big as my cousin’s?” Why can’t I get Lego Mindstorms- it’s only $349 and educational?” Adults often do a poor job of answering. They may deflect the question as impolite. Or they may respond defensively. The right way is to use the question as a “teachable moment”- an opportunity to increase the financial education of the child. Of course, this isn’t always easy, especially after a full day or work, school and outside activities.
Over time, the children should understand both the family budget and the choices made in determining it. “What are our needs, wants and wishes?” “What priorities did we determine?” “Why did we make those choices?”
It’s good to have them involved in the decision-making process on certain items. For example, spending money on a high-end family dinner out or putting the money towards the “Disneyland fund.” They see much of the spending. However, credit cards make it difficult for them to quantify items. That’s why Mr. Parker’s bag of money was so instructive.
Wealthy families have special challenges. You may worry that the children will flaunt their good fortune or think they never have to work. Full disclosure may not be the best solution. Rather, involve the children is smaller financial learning experiences requiring math comparisons and making good choices.
Financial literacy is a process. Over time and with regular communication, children will better understand the family budget, key questions, priorities, and choices. And, they will understand the math involved in evaluating choices rationally rather than emotionally. This is particularly valuable when they become teenagers, as they start to make choices about college and student debt and as they move into the working world. A good financial education will help them throughout their lives and hopefully will be passed along to their children someday as well. Our core purpose at DWM is to protect and enhance the net worth and legacy of our client families. Financial literacy for the entire family is a key to meeting that goal. Please let us know if we can help in any way.