The raging student loan crisis is often cited as evidence that many young people enter adulthood with a deficit in their own financial literacy. According to a 2015 study by the accounting firm PwC, millennials aged 23 to 35 are ill-prepared to handle the monetary challenges they are likely to face. Only 24 percent demonstrated a basic knowledge of financial concepts, and over 40 percent had utilized costly alternative financial providers like payday lenders or pawn shops. A startling 81 percent of college-educated millennials had at least some long-term debt.
In response, states are slowly beginning to mandate the introduction of basic financial education into school curricula, which is admirable and long overdue.
Christopher A. HopkinsBut understanding money, saving and credit begins at home, and should start earlier than you may have thought. Turns out that most everything you need to know about money you should have learned in second grade.
Researchers from Cambridge University have concluded that most of the important habits, both good and bad, that will govern a person's financial behavior have been established by age 7.
"The habits of mind, which influence the ways children approach complex problems and decisions, including financial ones, are largely determined in the first years of life," said David Whitebread, one of the study's authors. This implies that a half-semester high school course in balancing a checkbook just won't cut it. Ultimately, this is predominantly a home-school subject that needs to begin early.
The task is additionally complicated by the shifting modalities of money and spending to which we are accustomed. Cashless transactions, online banking and electronic bill paying leave fewer opportunities for teaching tangible lessons about the value of money. Hence, it is important to return to basics if our kids are to grasp the important concepts that will set them on the right road to financial stability.
As soon as a child can count, she can begin to count coins. In time, the nascent financier will come to understand the equivalence of 10 pennies with one dime, and so forth. Give the student an A once she comes to prefer a dollar over 20 nickels.
Children should also understand the concepts of value and exchange at an early age. Grocery shopping makes for an excellent field trip. Have the child read the price as you pull items off the grocery shelves, and maybe keep a running total on a calculator. And as inconvenient as it seems, try using cash on occasion so your pupil can visualize the value of the items in your cart.
Another time-worn but invaluable teaching tool is the old three jar routine. Consider giving your child an allowance on a regular basis, with the proceeds to be divided among the jars labeled "savings", "spending" and "giving". You set the distribution rules, say 25-65-10, and talk about how adults allocate their paychecks according to a similar discipline (if this hits a little too close to home, it's never too late to learn).
To make the lesson more tangible, set aside some small category of spending for which your budding young consumer must pay out of her own funds, like treats or small toys. Let her make the purchase, hand over the money and count out the change, then talk about the transaction once you get home. And when she sees the middle jar is empty, she can learn about buyer's remorse.
In a world of cashless transactions on our iPhones, it is easy for us to forget how we learned these important lessons. But early, tangible financial lessons provide the foundation for our children's lifelong success.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.