With over a decade of advances in the field of financial socialization, it can be difficult to find exactly what you’re looking for advice on. What have financial researchers learned about how money impacts families and how to teach children about finances? This article summarizes a decade of family financial socialization research,[1] which is the study of how families teach their children about finances and the consequences those teachings have on children’s later financial outcomes. Please feel free to use this article as a segue to various sources of academic information on financial socialization.
Many emerging adults are struggling with their finances, which can lead to more stress and worse mental illness.[2] One way to combat these financial struggles is to improve financial socialization in the home.
Financial socialization theory states that family interactions such as parent financial modeling (what parents’ financial example teaches their children), parent-child financial discussion, and parents providing hands-on learning opportunities for their children with money all contribute to children’s later healthy financial behaviors.[3]
While parents are the most impactful mode of financial socialization, children also learn from numerous other sources including but not limited to financial literacy classes, financial books, and financial media. Research shows that financial socialization has such a significant impact on later financial behaviors because financial socialization affects children’s core values, perceived needs, life expectations.3 These views are then directly associated with healthy financial behaviors, which, in turn, lead to better financial well-being, higher satisfaction with one’s financial situation, and less financial distress.
Another aspect of financial socialization is gender. Studies find that parents engage in financial discussion with male children earlier, on average, than female children.[4] In addition, White privilege (the inherent privileges experienced predicated on race) plays a role in finances as well. White children are more likely to have a savings account than their non-White peers.[5] Children from higher socioeconomic backgrounds also experience better parent financial modeling,[6] financial discussion,[7] and hands-on experiential learning.[8],[9]
Studies suggest that financial modeling (parents’ financial example) is a very effective method of financial socialization.1 Healthy financial modeling correlates with positive financial outcomes such as financial knowledge, behaviors, and capabilities. Interestingly, even parental warmth has an effect on children’s later financial behaviors.[10] Having experienced parental warmth in childhood was negatively associated with credit-card debt in adulthood. Meanwhile, parental warmth to their emerging adults was positively associated with financial independence and healthy financial attitudes. Overall, findings suggest that authoritative parenting (high warmth, high support, appropriate limits) is best for both adolescent and adult financial behaviors.
Parents who were positive financial role models for their children also tend to talk to their children about finances. Since parent-child discussion is positively associated with healthy financial behaviors for their adolescents, discussing finances with your children can also help them financially. Indeed, having parents who were open about family finances leads to less anxiety about finances in emerging adulthood.[11] Based on this research, here are three takeaways for parents.
Takeaways:
1. Talk to Your Kids About Money. Although money can be taboo to discuss, it is very important for your children’s financial future that you are open with them about money and help them understand how to flourish financially. This could include teaching children how to budget and/or sharing how you budget for the family, and teaching them financial principles such as compound interest or what inflation is. For specific tips on how to do this, see these articles.
2. Work on Developing Healthy Financial Habits Yourself. In the words of a wise man, monkey see, money do. Thousands of years later, the remnants of this wise philosophy reign on. In other words, your children will likely follow in your financial footsteps, so it is crucial to show them the right way to live financially. As your children see you implementing regular financial habits such as discussing money with your partner weekly, creating and following a budget, regularly putting money towards savings and retirement, etc., they are more likely to acquire these habits themselves.
3. Give Your Child the Opportunity to Practice Using Money. Parenting practices such as giving allowance, opening a savings account with your child, helping them to budget their own money, etc. can help them to not only conceptually understand money through your discussions but also to internalize the important financial principles you are teaching them. Helping your child be financially self-sufficient now can pay dividends for their future.
References:
[1] LeBaron, A. B., & Kelley, H. H. (2021). Financial socialization: A decade in review. Journal of Family and Economic Issues, 42(1), 195–206. https://doi.org/10.1007/s10834-020-09736-2
[2] FINRA IEF. (2013). Financial capability in the United States: Report of financial capability in the United States. Retrieved from https://www.usfinancialcapability.org/downloads/NFCS_2012_Report_Natl_Findings.pdf
[3] Gudmunson, C. G., & Danes, S. M. (2011). Family financial socialization: Theory and critical review. Journal of Family and Economic Issues, 32(4), 644–667. https://doi.org/10.1007/s10834-011-9275-y
[4] Agnew, S., & Cameron-Agnew, T. (2015). The influence of consumer socialisation in the home on gender differences in financial literacy. International Journal of Consumer Studies, 39(6), 630–638. https://doi.org/10.1111/ijcs.12179
[5] Gutter, M. S., Garrison, S., & Copur, Z. (2010). Social learning opportunities and the financial behaviors of college students. Family and Consumer Sciences Research Journal, 38(4), 387–404. https://doi.org/10.1111/j.1552-3934.2010.00034.x
[6] Shim, S., Barber, B. L., Card, N. A., Xiao, J. J., & Serido, J. (2010). Financial socialization of first-year college students: The roles of parents, work, and education. Journal of Youth and Adolescence, 39(12), 1457–1470. https://doi.org/10.1007/s10964-009-9432-x
[7] Luhr, S. (2018). How social class shapes adolescent financial socialization: Understanding differences in the transition to adulthood. Journal of Family and Economic Issues, 39(3), 457–473. https://doi.org/10.1007/s10834-018-9573-8
[8] Friedline, T., & Rautkis, M. (2014). Young people are the front lines of financial inclusion: A review of 45 years of research. Journal of Consumer Affairs, 48(3), 535–602. https://doi.org/10.1111/joca.12050
[9] Kim, J., LaTaillade, J., & Kim, H. (2011). Family processes and adolescents’ financial behaviors. Journal of Family and Economic Issues, 32(4), 668–679. https://doi.org/10.1007/s10834-011-9270-3
[10] Gauly, B. (2017). The intergenerational transmission of attitudes: Analyzing time preferences and reciprocity. Journal of Family and Economic Issues, 38(2), 293–312. https://doi.org/10.1007/s10834-016-9513-4
[11] Vosylis, R., & Erentaitė, R. (2020). Linking family financial socialization with its proximal and distal outcomes: Which socialization dimensions matter most for emerging adults’ financial identity, financial behaviors, and financial anxiety? Emerging Adulthood, 8(6), 464–475. https://doi.org/10.1177/2167696819856763