Frugal Family: Teaching Kids Financial Literacy

Last week, Senators Jamie Eldridge and Barry R. Finegold sent ato the editors of local Patch sites.  In the letter, they expressed concern that increasing numbers of young people are growing up and leaving home “ill-equipped to make informed decisions” with respect to money. The senators cited statistics that back this assertion and expressed support for “An Act Establishing a Financial Literacy Curriculum.” This initiative would integrate financial literacy lessons into the current Massachusetts public schools’ math curriculum. Starting in kindergarten and continuing through senior year of high school, kids would be taught age-appropriate skills designed to improve their chances to make sound financial choices as adults.

When I read this, I had two thoughts. The first was This is a great idea! The second was Is this going to take time away from other important content? If so, maybe parents should be charged with this task. In any event, the people raising the kids will need to weigh in on some aspects of what’s taught. It won’t be all interest rate calculations. There are values involved, and these are subjective.

Many parents can tell you the moment they realized that their child didn’t understand the relationship between earning money and spending it. My sister is not the only mother who has told me that she’s been instructed to “just get more money out of the ATM, Mom!” after denying a request for an expenditure.  At some point, we all have to explain the modern-day equivalent of Money Doesn’t Grow on Trees!  We have to communicate that it’s not only that some things are not affordable; some are not things on which we choose to spend our hard-earned dollars. Depending on the age of the child, this either falls on deaf ears or is followed by a preliminary understanding that there are grey areas to this money business.

I thought I had spent a good amount of time thinking about this issue of financial literacy. I certainly talk about it with my children much more than my parents did with me and my siblings. After reading Joline Godfrey’s Raising Financially Fit Kids, however, I feel like a complete novice. There is, it seems, much more to this objective than teaching kids to handle an allowance, to distinguish between wants  and needs, and to avoid debt.  She recommends scores of ways in which to instruct  kids around finances that I had not even considered.

Godfrey’s basic premise is this: “Kids need to learn financial skills before the stakes are really high—that is, when they are on their own.” This is exactly what Senators Eldridge and Finegold are saying.  Godfrey writes that the “greatest disservice” parents can do is to “keep filling the well” for their offspring. She doesn’t care how wealthy a family is; she is clear that kids should not be indulged to the point of becoming shielded from reality when it comes to finances. Mistakes should be made while still under parents’ supervision. This way, they become teachable moments that positively influence the future instead of serious problems.

The central lesson to be learned is that behavior has consequences. This will not be unfamiliar to children who have learned that antisocial acts will bring on time-outs or the loss of privileges. Mishandling money has repercussions as well. Most kids have no experience with that. In order to take care of themselves, though, they’ll need to make those connections. Money equals independence.

An important consideration is that parents need to be on the same page when imparting money sense to their kids. Assuming a couple has worked out a united approach to financial decisions, these values can easily be communicated. However, this is not the case in all families. Godfrey was once asked this question: “My husband and I disagree about how to teach financial responsibility to our kids. What can we do?” The answer was blunt: “Nothing. Giving kids conflicting messages about spending, saving, earning and giving away money is like trying to teach them to speak French while you speak German and your spouse converses in Spanish.” She advised the woman to work with her husband around finding common ground that could be passed on the children. Reading between the lines, though, it seemed apparent that Godfrey was appalled.

Raising Financially Fit Kids contains a wealth of specific suggestions for children of various ages.  One universal recommendation, however, is that parents engage “financial mentors” to assist them in their mission.  Exposing kids to the opinions and experiences of others whose values are similar to those of one’s parents appears to be an effective strategy. Teenagers are often prone to dismissing parental guidance. Advice from a relative or close friend is usually met with less resistance.

Here are some cumulative strategies to consider implementing:

Introduce Basic Skills (Ages 5-8)

Define basic concepts like saving, spending and managing money. Give a modest allowance and insist that some of it be saved. Talk about goals and delaying gratification.

Teach More Advanced Concepts (Ages 9-12)

Model comparison shopping and wise spending. Introduce budgeting. Explain what an entrepreneur is. Have your child chip in for special items or experiences. (Godfrey: “If your daughter has horse fever, making her contribute to her passion will help her decide how serious she is.”) Decide what discretionary spending will be the child’s responsibility.  Keep a running list of tasks that can be completed to earn money over and above an allowance.

Expand Financial Vocabulary (Ages 13-15)

Help your young teen grasp the concepts of investing, dividends, and the relationship of time to money. Introduce philanthropy. Have your child commit to savings goals and follow through. Allow your teen to earn money outside the home.

Share Real-World Examples (Ages 16-18)

Encourage self-sufficiency and resourcefulness. Give your child a monthly sum of money to manage. This can be for clothing, entertainment, and/or other personal expenses. Support your teen’s entrepreneurial pursuits. Help your young adult open a brokerage account and research investment options. Consider sharing the family budget so that your child has a realistic picture of the costs of housing, food, utilities, insurance, taxes and other necessities.

After that, it's off into the real world where your child will put these money skills into practice. The first goal: No freshman-year credit card balances!

Joline Godfrey believes that “parents who share their own passions with kids offer a living role model, demonstrating that life is full of zest and wonder and that being financially responsible is part of what makes it so.” Have you embraced this philosophy? Do you agree that financial literacy should be taught in schools? Comments and advice are welcome.