Financial Literacy is a Family Affair

Dec 08

Financial Literacy is a Family Affair

It could be argued that the worldwide financial crisis that began in 2007-2008, and still resonates today, was fueled by financial illiteracy. Writing on the US News site in August 2016, entrepreneur and performance coach Josh Felber argued that the crisis was caused, at least in part, by people forgetting some very basic lessons about money, perhaps especially this one: “Don’t borrow more than you can repay.”

While that may seem like an over-simplification (let’s not forget the big banks and the subprime lenders who encouraged this rampant borrowing), there’s more than a grain of truth to Felber’s declaration. And even in this post-crisis era, too many borrowers still make irrational choices that can end up being quite costly. They overestimate their ability to meet the terms of a loan, they borrow much more than they actually need, or they fail to thoroughly research lenders before filling out a loan application. The subprime mortgage bubble may be a horror of the past, but many people are still setting themselves up for a personal financial crisis by failing to make educated choices.

When parents make unwise financial choices they’re not only affecting their own well being but also, of course, that of their children. Worse, by failing to teach their offspring about responsible money management, they’re affecting the kids’ futures. The aforementioned Mr. Felber also made the point that one of the most important roles we can play as parents is to educate our kids about finances. The hope is that they won’t have to learn these lessons in the school of hard knocks, as so many of us did during the crisis.

Financial literacy is truly a family affair, or it should be.

Schools can help, but they’re only part of the solution

In recent years numerous studies have been conducted that paint an alarming picture of financial illiteracy both worldwide and in specific countries such as the US or the UK. One solution would seem to be more widespread financial literacy education, not just at the university level but at lower levels as well, even in primary schools.

Yet some researchers question the effectiveness of such classes on actual behavior. A 2009 study by Lewis Mandell and Linda Schmid Klein concluded that financial literacy education is ineffective, though Mandell later became a proponent of early financial literacy education. A 2014 Harvard Business School working paper (Cole, Paulson and Shastry) suggested that traditional personal finance courses in high school were ineffective but that additional mathematics training leads to greater financial participation. So it may be that innumeracy – mathematical illiteracy – is the core problem. It seems self-evident that if kids are more numerate they are more likely to know the true value of money, and perhaps act accordingly.

Even so, there’s more to managing one’s finances than being able to crunch numbers. And there are those who would disagree with the contention that personal finance courses are of negligible value. Material that is presented in an engaging way, so students understand its relevance to their lives, can make a difference. Some teachers are seeing positive results when financial literacy lessons are brought to the classroom, even at primary-school levels. When students learn how money works, they’re more careful with their spending and start taking better care of their things, according to Kristi Ekern, a fifth-grade teacher in Colorado. And some teachers are reporting that kids actually take their newfound money knowledge home and help educate their parents.

The problem, of course, is that not all schools offer comprehensive financial literacy curricula or even any finance classes at all. What it boils down to is that parents are ultimately responsible for their children’s education, financial and otherwise. If that sounds like a scary prospect, it isn’t. You don’t have to be an economics professor to teach your kids the basics of good money habits, but it helps if you practice these habits yourself.

Teaching your kids about personal finance

Writing on the Forbes site in July 2016, CPA Janet Berry-Johnson cited Bank of America Better Money Habits’ suggestions for teaching your kids basic money management skills. Perhaps one of the best ways to teach preteens and adolescents about savings is to encourage them to set a savings goal. This may be appropriate for younger kids as well. The point is that setting a savings goal is a skill that will be useful for years to come.

You can also use everyday situations, such as a trip to the supermarket, as an opportunity to play a money saving game. Even young kids can grasp this. Let your child pick an item from your shopping list and then have her or him find the sticker price and do some comparison shopping. As the child gets older you can teach him or her to compare unit prices and figure out how buying large quantities can save money.

Management of allowances is an issue that every parent needs to consider. The Better Money Habits site has guidelines for allowances for kids of all ages, from the lower levels through high school.

It’s also important that you teach your teens how to budget and make responsible borrowing decisions. Getting your teen a debit card can be a good step towards teaching him or her about responsible spending. (Make sure your kids are adequately educated about, and protected from, identity theft.) Teach your kids how loans work, emphasizing that a loan is not “free money.”

Finally, honesty is key to effective financial education. If you want your children to be fiscally responsible and to be really engaged in family finances, you have to be upfront with them. If you need to cut costs because you have a big expenditure coming up, explain that to them. Make them see that your family is a team and that they are valued members whose cooperation is necessary for the well being of the team.

If you have concerns about your own level of financial literacy, you’re not alone, and it’s never too late to improve. Education should be an ongoing process. There are books and other info-products, web sites, courses (online and off), and apps that can help you brush up on the basics and become a better money manager. You and your kids can learn together, and by doing so can improve your financial picture and strengthen your family bond. Financial literacy is one of the best gifts you can give your children – and yourself as well.