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Building Financial Confidence in Children

Framing the Issue

You have probably heard the clamoring on the TV or in an article: “We need more financial literacy for the younger generation! There should be a mandatory high school finance class!”. These shouts come from good places, but reality is a bit more nuanced. 

Here’s a hypothetical situation: a doctor, an auto mechanic, an engineer, and a waiter are sitting in the same room. Their salaries and hours may differ, but they all struggle with debt, investing, and basic money management. They come from different backgrounds, they received different levels of education, and they are all different ages. The doctor and engineer attended many years of formal schooling, and yet they are no further ahead than the auto mechanic or waiter who came from less wealthy families and received no formal education beyond high school.

Chances are, the doctor and engineer attended a business or finance class in college. But as we know, that does not guarantee financial success. You may even be aware of more extreme examples. How is it that someone who rises from nothing is able to create generational wealth, whereas a different individual, the ivy league educated child of a millionaire business mogul, can squander away their fortune before they turn 40?

While financial education is important, it is not a be-all and end-all. In this article, we are reframing the focus from financial education to financial confidence.

An Important Clarification: Knowledge Is Not Skill

As adults, and specifically adults with kids, our time is valuable. Most of us are willing to do whatever it takes to give our kids a better life than we had. Some of us may want to instill financial responsibility in our children very early on. How might we go about that? Many would start with compound interest, budgeting, and maybe an overview of the different retirement accounts and investment vehicles. Certainly not a bad start, but is that really the differentiator between people who are good with money and those who are not? Most people above the poverty line have a very basic understanding of retirement accounts and investing. Some more, some less. Even those with a deep understanding of 401(k)s and derivative investing can make poor decisions. Unfortunately, in finance, a bad decision early can have long-lasting ramifications.

This rounds us back to the relationship between knowledge and skill. While no one is suggesting not to educate children on basic financial concepts, it would be a mistake to assume that once those have been explained, that the path to financial freedom is all but assured. There is no substitute for experience, and no better example for a child than someone close to them that has consistently made good choices. Some of the best financial decision makers can be those with very little. Alternatively, some of the richest people we know can be terrible with money, but the reality is that they have so much of it, it doesn’t really matter. One’s behaviors, attitudes, and temperament may have a larger effect on financial outcomes than technical knowledge. 

As With Getting in Shape, It Is Never Too Early to Start 

Nature versus nurture is debated frequently, but laying the ground work for financial success early certainly won’t do any harm. Research by the University of Cambridge finds that children begin learning and understanding the basic concept of money between ages 4 and 7. Where does this learning and understanding take place? Mostly from watching those close to them. Who spends the most time with their young children? Normally the parents and other family members. That’s why it is important for those of us close to kids to be setting a good financial example. Most people probably aren’t thinking about their own financial habits and attitudes when their kids are so young, but maybe they should. Something as simple as having your child around when you pay bills can have a lasting impact. Allowances are another great place to educate.

Instead of just paying an allowance, tying it into something simple like the bucket approach could be extremely beneficial. Explain that there are three buckets, such as saving, giving, and spending. Emphasize the importance of having money in each bucket and focus on the fact that the money is finite. Things like buying a toy for themselves, or buying a gift for a family member can only be achieved with the proper balance of spending and saving. It may sound silly, and they might not grasp the concept in its entirety, but exposure to fiscal responsibility could have a large impact down the road. How many times have you been surprised what a kid may do or say? As we sometimes find out when our young child says a bad word, much of this comes from imitation.

One Size Does Not Fit All

It is paramount to remember how different we all are as individuals. Some learn better visually, while others are more likely to retain information when listening to it. The same applies for children. When deciding how to educate them, make note of what has been successful in the past and apply it to finance.

Most of all, make sure they are having fun. Too often, the relationship between a person and money is one of fear. Money can be a taboo subject, and for good reason. People are naturally skeptical and fearful of what they don't know. Don't let unfamiliarity with money and financial concepts be an issue for your children. As is the case with almost everything in the financial world; take some small steps early on, and reap the rewards in the future. Children with strong financial mentors turn into financially confident young adults.

If you have questions about financial literacy and where to start with your kids, contact your Financial Advisor at Hefren-Tillotson.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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Hefren-Tillotson Inc. is a leading diversified financial services firm providing investment and retirement plan management and comprehensive, financial planning through MASTERPLAN® for individuals and businesses. The firm’s wealth management services are administered by Certified Financial Planner (CFP) professionals, Chartered Financial Analyst (CFA) Charter holders, attorneys, Chartered Life Underwriters, and CPA/PFS’s. Hefren-Tillotson offers corporate services including 401(k) retirement planning, executive financial counseling, fiduciary reviews and workplace financial planning seminars. Founded in 1948, the firm is headquartered in Pittsburgh and has offices located in Pittsburgh, Butler, Greensburg, North Hills, and South Hills. MEMBER SIPC.