You’ve probably heard of the birds and the bees, but what about the birds and the budgets? In two studies, Ashley LeBaron-Black and her colleagues sought to understand how parents effectively teach their children about money.
In their first study[1] they found that there were three important “how’s” and four “what’s” that are key to teaching children about finances effectively. Their second study[2] led by Christina Rosa essentially examined this question related to teaching children about finances: do actions speak louder than words?
How Do Parents Effectively Teach Their Children About Finances?
The first study found that parents primarily taught their children about finances through experiences, discussions, their example, or a combination of the three. For instance, providing children with financial experiences might involve having a child open a bank account with an associated debit card or bringing children to the bank to physically deposit money into their savings account. These experiences, LeBaron-Black found, provided children with financial confidence that might not come in other ways.
Parent-child financial discussions could involve using monopoly money, for example, to illustrate paying various bills and how much money was left over after paying the bills. Another way is to take advantage of on-the-fly teaching moments; as parents are out and about with their children, they can talk to them about what their spending budget for their trip might be, which can help children further understand important financial principles.
Fundamentally, social science research suggests that children are likely to follow in their parents’ footsteps,[3] including with finances. Indeed, parents might find Ralph Waldo Emerson’s words to be true if they solely relied on discussing finances with their children: Your actions speak so loudly, I cannot hear what you are saying. Modeling may be more influential than discussion alone. In other words, parents’ examples of their financial management played a significant role in their children’s later financial management.
Building off this first study, the second study honed in on understanding how parents can use modeling to have a positive effect on their children’s future financial management. The study found that parents can effectively model what they want their children to do with finances by modeling employment, showing them how they use their income from that job, and showing them the difference between a job well done and mediocre effort. It was also found that parents’ example of avoiding debt, saving, budgeting, and frugality—and making sure their children observed them in these efforts—played a vital role in whether or not their children followed in their footsteps.
What Do Parents Teach Their Children About Finances?
The “what’s” of teaching family finance that LeBaron-Black found included four topics: financial planning, work ethic, money management, and charitable giving.
Financial planning was reinforced through actions such as having children set goals and make plans to save up for their own wants, such as a bicycle. To illustrate the time value of money, one family encouraged children to work on getting good grades in high school rather than working part-time so they could achieve a college scholarship, cancelling out the need for high school income.
In some families, work ethic was reinforced by rewarding children with financial compensation based on chores. Other parents encouraged children to get a part-time job so they could pay for their own phone plans, nights out with friends, etc.
Money management included encouraging children to live within a budget. One family did this by giving children a notepad to create and follow their budget. Technological advances, however, might also make learning how to manage and keep track of a budget easier for children.
Finally, financial giving involved modeling to children that money can be used to help others; they can donate to charities, they can spend money on family experiences, etc. In one instance, an adult recounted their parent always donated at cashier stands when the option was made available to show that money was not just for themselves but a resource to give back to those in need.
An interesting finding was that some children with negative parental modeling developed positive financial habits not just despite their parents’ poor financial example but because of it.[4] This is an example of “bonadaptation,” which means that a child benefitted from, instead of succumbed to, adversity. In short, these four “what’s” represent great places to start in teaching children about the birds and the budgets.
Takeaways:
- Teach children the four “what’s” of family finance: financial planning, work ethic, money management, and sharing. Share your financial resources by donating to charities or giving money to someone in need—and make sure your children are aware that you do so. Parents can also teach children to live within a budget by tracking their spending on a technological device. On these same technological devices, parents can encourage financial planning by helping children set financial goals and make plans to achieve those goals, which could involve saving a certain amount of money each week for a certain number of weeks. Finally, parents can model the value of strong work ethic for their children to follow by making their children aware of the work they do (paid and unpaid), what constitutes a successful workday, and how to execute one.
- Parents are the most influential source of children’s financial learning, including through their example. Children of parents who modeled working hard to earn a living, managing money wisely (avoiding debt, saving, budgeting, and frugality), being honest and transparent about money, and being generous with money were more likely to have the same financial habits in their own lives in emerging adulthood. It is not enough to practice sound money management; we must ensure that our children are aware of this sound money management so that they can, one day, manage their money as well as we hope they will.
References:
[1]LeBaron, A. B., Hill, E. J., Rosa, C. M. and Marks, L. D. (2018). Whats and hows of family financial socialization: Retrospective reports of emerging adults, parents, and grandparents. Family Relations, 67(4), 497-509. https://doi.org/10.1111/fare.12335
[2]Rosa, C. M., Marks, L. D., LeBaron, A. B., & Hill, E. J. (2018). Multigenerational modeling of money management. Journal of Financial Therapy, 9(2), 54-74. https://doi.org/10.4148/1944-9771.1164
[3]Bandura, A. (1969). Social-learning theory of identificatory processes. Handbook of Socialization Theory and Research, 213-262.
[4]Patterson, J. M. (1988). Families experiencing stress: I. The Family Adjustment and Adaptation Response Model: II. Applying the FAAR Model to health-related issues for intervention and research. Family Systems Medicine, 6(2), 202-237. https://doi.org/10.1037/h0089739