By Veronica Dagher
Some parents would rather speak to their children about practically anything other than money. But such reluctance carries a high price. While there are many legitimate ways to discuss finances with youngsters, financial experts say, two things are for sure: Start early and talk often.
The Wall Street Journal invited three people to join in an email discussion of the issue. They are Annamaria Lusardi, the Denit Trust chair of economics and accountancy at the George Washington University School of Business; Ted Beck, president and chief executive of the National Endowment for Financial Education; and Nathan Dungan, founder and president of Share Save Spend LLC, which helps educate families about money. Following are edited excerpts of the discussion.
Finding teachable moments
WSJ: Why is it important to teach children financial skills?
MR. BECK: At some point young adults will have to make financial decisions on their own, and they need to be prepared. Gaining financial skills as a child provides better opportunities and it makes you less likely to be taken advantage of.
MR. DUNGAN: One of the most important reasons to equip youth with critical financial skills is that it has the potential to significantly enhance their quality of life. Not only will teaching them about money equip them to achieve typical financial goals such as saving for college, but it will also help them address qualitative issues such as the impact money will have on their relationships.
WSJ: What are the most important financial skills to teach children?
MR. DUNGAN: I encourage families to run lots of age-appropriate experiments while their children are living at home. That may be a simple allowance of $6 a week for a child in elementary school all the way up to a few hundred dollars (or more) a month for a child in college. The key is to provide a variety of opportunities for them to make choices with money over a prolonged period, as it will help build their confidence and capabilities—critical elements for enhancing their financial well-being. And don’t forget to allow for lots of “oops” moments. It’s far better for them to make money mistakes in a controlled environment where you can coach into the situation than it is for them to be rudderless as they leave home for college.
MS. LUSARDI: I would simply say talk to children about money. We talk to them about many topics, but not as much about money.
WSJ: How do we speak to them? What do we say?
MR. BECK: The most effective way to teach is by having frequent discussions and don’t ever lecture. Look for teachable moments and always be willing to answer questions. If your child sees a financial decision being made by you or someone else, ask them if they think it was the right way to go. Reflection is a powerful teaching tool.
MS. LUSARDI: Children are dealing with money already, so there are many cases you can use. For example, they may get an allowance, and we can talk to them about what to do with that money and the decision of saving versus spending. Parents can also talk about the decisions they make—for example, why they save now for the child’s education.
MR. DUNGAN: I really like posing open-ended questions to children. For example, what is the biggest money mistake you ever made? Why should a young person share some of their money with a cause or organization?
How it can go wrong
WSJ: Is there anything you can say to children that is wrong when it comes to talking about money?
MS. LUSARDI: There are many potentially wrong lessons, and this is why I have always been concerned about leaving it only to parents to teach children about financial literacy. For example, one can teach them wrong lessons such as “stay away from the stock market” or “never borrow.”
MR. DUNGAN: I caution parents to be careful about oversharing financial stresses with their children. Children don’t have the same emotional capacity to manage information about a job loss or a significant downturn in the market. Another common mistake: expecting children to be perfect with money.
MR. BECK: Avoid angst and be careful not to create fear or blame what happened to you on someone else. Children repeat everything you tell them, so if you don’t want it passed on, don’t tell them.
WSJ: At what age should we start teaching financial skills to our children?
MR. BECK: A great place to start is with toddlers—teaching them that money is a tool of exchange, and about borrowing, trading and saving. At ages 8 to 10 they can learn the time value of money. With preteens and teens, my wife and I let our children manage yard sales, which was a useful, hands-on experience—and cleaned out our basement! As teens, a part-time job provides great, real-world experience.
MR. DUNGAN: As soon as they utter the phrase, “I want….” Seriously, though, by age 4 or 5 children totally get the drill related to money and their needs. I frequently warn parents that if you aren’t in the money conversation with your child, you are more or less abdicating the role of shaping their money narrative to the consumer culture.
WSJ: If you had to teach your children a few key lessons about money before they leave your house for college, what would those lessons be?
MR. BECK: The JumpStart National Standards [from the nonprofit JumpStart Coalition for Personal Financial Literacy] are a great resource here, because they cover guidelines for teaching children at kindergarten, fourth grade, eighth grade and 12th grade.
MS. LUSARDI: The lessons would be about financial independence, so they do not come back to live with the parents! Over time and with colleague Olivia Mitchell from the Wharton School, I have shown that knowledge of three simple concepts—the power of interest compounding, the workings of inflation, and risk diversification—go a long way in empowering people to make financial decisions.
WSJ: How frequently do we need to teach our children about money?
MS. LUSARDI: As frequently as possible, because repetition reinforces learning.
MR. BECK: Teaching financial skills should be embedded into daily decisions and discussions. Talking about finances should be a way of life—much like we talk about our physical health. Be on the lookout for teachable moments and times where you can engage your children in a discussion. Always be positive, but don’t push it to the point where they are likely to tune out and you risk losing their attention. Don’t ever try to do this in one sitting.
MR. DUNGAN: I’m more of a fan of seize-the-moment, five-minute lessons a few times a week than big discussions once a month or once a year, because that’s when your children’s eyes will glaze over. Things like comparison shopping when you are at a grocery store or physically taking them to a financial institution to open an account and occasionally add money to that account can help.
WSJ: What role do schools play in teaching children financial skills, especially since some folks would say that many schools have tried but haven’t been successful in this area?
MR. BECK: Ideally, teaching financial skills should be a combined effort at home and in the classroom. Money management is a life skill that should be taught in every school, but parental engagement is critical to make it effective. The issue is we need to have quality standards and give financial education adequate class time to be done effectively.
WSJ: What last tips do you each have about the best way to teach children financial skills?
MR. BECK: Remember, this shouldn’t be intimidating.
MR. DUNGAN: Stay the course and take the long view. The effort you invest today and in the future will help your child manage a variety of money issues, including the inevitable headwinds and obstacles bound to come their way.
MS. LUSARDI: Make the topics relevant so children can see why they should care about them.