If you want to raise financial whizkids, practice beats talking
Research shows that we don't talk to kids enough about finances, but giving them hands-on experience might be better anyway.
You've probably seen it first hand: kids love money. They pick up on its influence in society very early. Teaching a 5-year-old, a 10-year-old, or even an 18-year old about investing, though, is no easy task.
A 2014 study from North Carolina State University found that children pay close attention to issues related to money, but that they have large gaps in their knowledge due to parents being too uncomfortable to talk about it.
After interviewing 136 randomly chosen children between 8 and 17 and asking various financial questions, the researchers found that parents are good at talking with their kids about earning, saving, and spending.
However, there were other subjects that were 'off limits', including family finances, parental income, investments and debt. Worse, the study found that parents were far more likely to talk to their sons about investing and debt than they were to talk to their daughters. There was significant gender bias.
The trouble with all this, the researchers argue, is that even young children are aware of financial issues and are forming habits based on parental modelling, whether or not parents actively discuss money at home. If parents aren't talking to their kids about money, the children could be learning the wrong lessons based on inaccurate information. It's the old idea that 'if you don't teach your kids about drugs, someone else will'.
For those who don't like to talk
Conversations about money can be hard. This article isn't a lecture on talking to your kids more. Thankfully, there's another way to teach the same lessons: research from the University of Arizona suggests that giving kids hands-on experience with money is just as good at teaching financial skills as conversations and modelling. Here are four easy ways to get the snowball rolling:
1. Start early with measurement. A moneybox to accumulate savings is one of the best gifts you can give your kids. Combined with a weekly allowance for chores, it teaches them that hard work and patience is rewarded. To take it a step further, have them chart their savings visually so they can track their progress, or offer them an interest rate so they learn the benefit of compound returns. As the saying goes, 'that which is measured, improves'.
2. Give your kids an allowance. Whether it's a weekly allowance for canteen lunches, or a Westfield gift card for buying back-to-school supplies, giving your kids some control of spending teaches them the value of money and encourages them to seek more bang for their buck. You can supercharge the value-seeking mindset by letting them keep any money left over. Shopping centres are also a great place to teach kids about debt - if they want a pair of shoes, consider lending them the money at a defined rate of interest and payback period. It might seem harsh, but a few early lessons about debt could save them some expensive lessons later on.
3. Involve kids in everyday financial decisions. Get them to calculate the restaurant bill before it arrives or let them work out a tip. At an amusement park, you could ask your kids to figure out whether buying individual or family tickets offers the better deal. If you have to book flights, make it a competition for who can find the lowest fare. This can eventually be taken to more advanced levels, like deciding between different savings accounts or mortgages given a range of interest rates and fees.
4. Let them lose. Warren Buffett had a pokies machine in his house for his kids to blow their money on. A similar lesson can be taught by offering your kids a rigged game at the dinner table: a coin toss where they pay $1 to play and win $1.50 if it comes up heads. A little gambling between you and a 5-year-old is much better than a lot of gambling between a casino and a 30-year-old.
We'd love to hear about your own tips on teaching kids about money in the comments section below.
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