In a world with information readily available at our fingertips, we often forget about the power of teaching within the home. For example, although children could Google any financial question, what and how they learn about money from their parents (called financial socialization) is the top predictor of their future financial wellbeing.1 The financial literacy gained through these processes will inevitably benefit children later in life as it is applied in emerging adulthood.2,3 Why do children learn more about money from parents than from peers, media, work, or other sources? The home is where children spend most of their time, and the groundwork laid there can have long lasting effects on children’s attitudes and behaviors. There are three primary ways that parents teach children about money: modeling, discussion, and experiential learning.4
- Modeling – This is a form of financial socialization where children learn through observing the financial actions of their parents.3 It is in ordinary, small moments that children learn some of the most valuable financial lessons. When children see their parents paying bills, budgeting, or visiting the bank, they see the importance of these actions and they learn skills that they can implement in the future. In contrast, when children do not see their parents participate in these everyday actions, it can hinder their understanding of the value of money and the ins and outs of effective money management. This may lead to a lack of self-control when spending money later in life or create more stress because they do not know how to properly handle their own finances. Thus, for financial socialization, the common saying “Do as I say, not as I do” should be “Do as I say AND as I do.” Parents can lay the foundation for their children as they set the example for financial skills and habits.
- Discussion – In addition to being the model for their children, it is also important for parents to verbally communicate with their children about finances. Having open and frequent discussions about finances leads to positive outcomes. For example, research has found that emerging adults who engaged in parent-child financial discussions growing up have better financial knowledge, attitudes, and behaviors.3 Parents should create a space for children to ask questions and learn at an age-appropriate level how to manage their own money.
- Experiential Learning – The third way parents teach their children about money is by facilitating children’s personal experiences with money. LeBaron-Black and colleagues stated that experiential learning is “the process of using life experience to internalize financial knowledge.”3 This could be done by helping children open a savings account or providing opportunities to earn money in the home. Just as we do not expect children to know how to tie their shoes until they have been given sufficient instruction and opportunities to practice, we cannot expect children to know what to do financially without previous experience. Mistakes are part of the learning process. Thus, it is important to allow children opportunities to practice money management while under your supervision. Allow them to make mistakes, then help them learn from them. A small financial mistake made as a child can be a learning experience for future financial endeavors.
Financial socialization may seem simple or menial, but it is crucial for children’s future wellbeing. The more a parent teaches their children financial principles through modeling, discussion, and hands-on experiences, the more confident their children can become in their own financial skills. On the other hand, emerging adults who did not receive sufficient financial preparation are at a higher risk of negative financial behaviors.3 As parents take time to teach their children about money, they can help prevent future financial stress when their children transition into adulthood.
1. Teach healthy financial behaviors early on and consistently.
Teaching your child about finances is not something to start when they are getting ready to fly the coop but should start from a young age and implemented on a regular basis. The home is the place to start teaching principles like the value of money, how to earn it, and how to effectively manage it. Instead of budgeting in private, do it in an area where your child can see and learn from your example; instead of paying for everything that your child wants, give them opportunities to earn and save their own money; and instead of avoiding questions about money, find opportunities to discuss age-appropriate financial principles with your child and offer them the chance to ask questions.
2. A positive example leads to positive behaviors.
Just as positive financial examples can lead to positive financial behaviors, negative financial examples can lead to negative financial behaviors. Provide opportunities for your children to see you managing money. Some ideas may include discussing with them where your paycheck goes or paying for groceries with cash so they can see the physical transaction. If you do not feel confident in your own financial knowledge, take time to learn from books, podcasts, or personal finance courses.
3. Reflect on what you wish you had learned about money as a child and teach that to your child.
A simple question parents can ask themselves is “What do I wish I had known before becoming a financially independent adult?” or “What am I grateful I knew before leaving home and becoming financially independent?” As we remember what it was like to go out on our own and take care of ourselves financially, we can put a greater emphasis on preparing our children for their financial future. Be a good example, communicate openly, and give your children opportunities to practice before they go out into the real world.
1 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
2 Gudmunson, C. G., & Danes, S. M. (2011). Family financial socialization: Theory and critical review. Journal of Family and Economic Issues, 32, 644– 667. https://doi.org/10.1007/s10834-011-9275-y
3 LeBaron, A. B., & *Kelley, H. H. (2021). Financial socialization: A decade in review. Journal of Family and Economic Issues, 42, 195–206.https://doi.org/10.1007/s10834-020-09736-2
4 LeBaron-Black, A. B., Curran, M. A., Hill, E. J., *Freeh, M. E., Toomey, R. B., & Speirs, K. E. (Published online). Parent Financial Socialization Scale: Development and preliminary validation. Journal of Family Psychology. https://doi.org/10.1037/fam0000927