Many individuals and families find themselves in a precarious financial situation these days, especially as the cost of receiving education increases,[1] housing prices rise,[2] and living expenses climb.[3] In all the hustle and bustle of just trying to survive financially themselves, some parents may be curious about or even become distraught when thinking about how they should prepare their children for a financial future. Some parents may try their best to have discussions about finances and actively teach their children, while others may label financial discussions as “adult topics” and try to shield their children from the stressful reality of money management.
The thing is, whether or not parents intentionally teach their children about money, the child will learn something about finances. The process of learning about money is called financial socialization, and all kids experience it. In the world of family science there is a theory called family financial socialization theory[4] that explains the process and outcomes of financial socialization. In short, the theory says that individual and family characteristics (their gender, income, ethnicity, beliefs, etc.), the interactions and relationships between family members, and the ways family members teach each other about money all affect their financial outcomes (their financial attitudes, knowledge, capabilities, behavior, and well-being). What a child learns about finances can affect the rest of their life by influencing their financial behaviors and impacting their financial well-being.
That said, you might wonder, “But how!? How can I teach my kids?” And the truth is, there is no one-size-fits-all answer, but there are a lot of tips and tricks that researchers have learned through the years.
Recent research by David Allsop and colleagues describes the influence that parents have on their children’s financial knowledge, capabilities, and well-being.[5] These are some of the key takeaways from their research and some additional tips:
Takeaways
1. Set the example of how to manage finances appropriately. As previously mentioned, whether or not a child is formally taught something, they will learn. Children mimic what they see, and how a child sees their parents handling money, may eventually be the way the child begins to handle their own money. If those actions are positive—things like creating a budget or paying bills on time—those are the things the child will eventually learn to do as well. But if they see their role models going into unnecessary debt or obsessing over their material means, those are future actions they could also develop. Research shows that an example of healthy financial behavior from parents can lead to higher financial satisfaction and well-being for their children in the future.5 Of course, a good role model does not guarantee financially savvy children, but it is a good way to set a solid foundation for future financial outcomes.
2. Purposefully teach your children about money. Research by Dr. David Allsop and his team concludes that parent-child interactions and relationships as well as the way parents teach about money predict future financial capabilities, well-being, and satisfaction in their children.5 It is important that kids are not only taught about money, but that they are taught intentionally. Three research-backed methods for teaching your kids are to (1) have open conversations discussing and teaching your kids about money, (2) be an example in the way you handle your own finances,[6] and (3) create hands-on experiences with money for children.[7] Each of these actions have a unique role to play and are best applied all together, but if there are two that are most important and have the most significant effect on children’s financial outcomes, they would be to be an example and create experiences.[8]
3. Involve both parents and be an equal partner in educating your children. Allsop’s study reveals that each parent can make a difference in teaching their kids about money. It is good to have either a father or a mother leading the way and purposefully financially socializing a child, but it is better to have both parents equally involved in this process as it increases children’s financial literacy and eventual financial independence!5 The reason why this is the case is unclear, but spouses handle and think about their finances differently, and two different perspectives could be valuable to the learning child. Each parent brings their own experiences, opinions, capabilities, and valuable insights that can provide different perspectives for the child to learn from. As each parent brings different strengths to the table, the child can learn from multiple examples and through repetition.
4. Decrease stress surrounding money. Interestingly enough, the stress felt by a parent about finances often carries onto their children. In this case, it doesn’t matter if the parent or child has healthy financial practices, if a child grows up seeing their parents stressed over money, they eventually take on the perspective that money is just a stressful thing, and they too experience financial distress.5 This can negatively impact financial satisfaction, again, even if financial habits are healthy and a person is financially well-off. So don’t stress too much about money! A lot easier said than done… but practicing proactive coping may help.[9] Coping is often seen as a reaction to stress that has already occurred, but proactive coping is different because it is future oriented. You apply coping techniques prior to experiencing stressful events and it generally changes how a stressful event actually affects you. Proactive coping in finances could mean that you create financial goals for the future or that you change your perspective so that you view potentially stressful situations as a challenge that can be overcome rather than a risk that could be harmful. Many other techniques could be used as well. These are just a few suggestions.
You can make all the difference for your children’s financial future—so be intentional in your teaching!
References:
[1] Kerr, E. & Wood, S. (2023, September 22). A look at 20 years of tuition costs at national universities. U.S. News and World Report. https://www.usnews.com/education/best-colleges/paying-for-college/articles/see-20-years-of-tuition-growth-at-national-universities.
[2] U.S. Census Bureau and U.S. Department of Housing and Urban Development, Median Sales Price of Houses Sold for the United States, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MSPUS, June 27, 2024.
[3] U.S. Bureau of Labor Statistics. (2024, July 17). Consumer prices up 3.0 percent from June 2023 to June 2024. Retrieved July 23, 2024, from https://www.bls.gov/opub/ted/2024/consumer-prices-up-3-0-percent-from-june-2023-to-june-2024.htm.
[4] 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
[5] Allsop, D. B., Boyack, M. N., Hill, E. J., Loderup, C. L., & Timmons, J. E. (2021). When parenting pays off: Influences of parental financial socialization on children’s outcomes in emerging adulthood. Journal of family and economic issues, 42, 545-560. https://doi.org/10.1007/s10834-020-09716-6
[6] Serido, J., & Deenanath, V. (2016). Financial parenting: promoting financial self-reliance of young consumers. In: Xiao, J. (ed.) Handbook of consumer finance research (2nd ed., pp. 291-300). Springer, Cham. https://doi.org/10.1007/978-3-319-28887-1_24
[7] LeBaron, A. B., Runyan, S. D., Jorgensen, B. L., Marks, L. D., Li, X., & Hill, E. J. (2019). Practice makes perfect: Experiential learning as a method for financial socialization. Journal of Family Issues, 40(4), 435-463. https://doi.org/10.1177/0192513X18812917
[8] LeBaron-Black, A. B., Curran, M. A., Hill, E. J., Toomey, R. B., Speirs, K. E., & Freeh, M. E. (2022). Talk is cheap: Parent financial socialization and emerging adult financial well-being. Family Relations, 72(3), 1201-1219. https://doi.org/10.1111/fare.12751.
[9] Greenglass, E. R., & Fiksenbaum, L. (2009). Proactive coping, positive affect, and well-being: Testing for mediation using path analysis. European Psychologist, 14(1), 29–39. https://doi.org/10.1027/1016-9040.14.1.29