Financial Education

Following the market crash and recession of 2008, the Canadian government has launched a task force on financial literacy. The assumption seems to be that we wouldn’t get ourselves into messes like this if we were just smarter about money. This reasoning is problematic for a couple reasons. First, financial education is very difficult to quantify in that it’s not possible to tell the difference between people with bad habits and people who experienced bad luck. As an example, two individuals who declare bankruptcy may have different experiences; one may be because of overspending and undersaving, while the other may be the result of bad health and job loss. Further, we don’t make all of our decisions based only on financial criteria. Homo economicus does not exist, and we generally take into account preferences, styles and comfort in addition to economic cost and benefit.

But as far as people are able to learn and employ good financial habits and sound decision making, how can we teach them? Because major financial decision are made as soon as children become adults (getting a credit card, opening bank accounts, paying for education),it stands to reason that we should teach children to handle money.

Children usually learn about money in their family. Most parents will give their children some pocket money or allowance, and allow them to use it as they wish. This gives children some experience with money as a scarce resource (it’s not unlimited) and with delayed gratification (saving up). Children also learn by watching the choices their parents make with money. In our society, money matters are generally not considered an acceptable topic of conversation, so children may get messages that are at odds with reality. For example, parents may have sacrificed and saved for years to pay off the mortgage, and then start spending more freely when the debt is repaid. But teenagers may only see free spending, then expect to continue that lifestyle in university or when they’re working their first job. More dialogue is almost always better.

We learn to make decisions by making decisions. Kids need an environment in which to practice using money where their mistakes won’t hurt them. “Wasting” all their money on candy will mean they can’t buy a toy, but they’ll survive. Giving a child a credit card, of course, wouldn’t be safe. Children should also learn that money can be used for many different things. Encourage them to spread it around: some examples include candy, toys, saving up for Christmas, long-term college savings.

School would seem to be the ideal place to teach children financial decision-making. However, schools can’t teach financial literacy the way they teach math or reading skills. Just presenting a lecture on the “correct” uses of money won’t instill good habits in children. Neither will completing worksheets. That’s because we learn by doing. Further, schools already manipulate children with punishments and rewards. If “money” is also used to manipulate children, they not only will not learn, but they may rebel against the very idea of acquiring financial skills.

The best way they could do it is to mimic the real economy. Teachers could give children a “salary” (in Monopoly money) for coming the class, the way employers give parents a salary for coming to work. Children can pay rent for their desk, buy their desk to avoid rent, and earn extra money by doing extra activities. Money can be used for trinkets or activities. I have read of a teacher doing this, and it seems to develop good habits in his students. He said that many more of his students owned homes after they became adults, compared to their parents.

Children can learn to handle financial resources wisely, as long as they are allowed to practice in a safe environment. We should answer their questions about where our money comes from and what we use it for, and possibly involve them in some decisions. Examples might be: vacation or cable TV for a year? A cruise or a staycation? Children should also have money, spend money, save money and even invest money. But we can’t force them to learn, and we could easily put them off of financial responsibility by trying to use money to manipulate them.