What Science Can Tell Us about Improving Our Children’s Personal Finance Skills

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Making a living in today’s world often seems more difficult than in decades past. The cost of living keeps rising, but not all occupations keep pace in terms of wages. Simultaneously, competition in the workplace is increasing, not only from humans but from machines.

Each successive generation feels this burden. It’s already threatening to squeeze out our middle class. And while many of the factors involved are out of our control, there’s still one key area in which we can exercise leverage: financial literacy.

The world of personal financial management is complex. It invokes personal skills, such as discipline and critical thinking, while also entailing understanding various banking and investment products. Thus, it offers a vital opportunity for us to make a difference by increasing our own capabilities and teaching those skills to our children.

Education matters

Many people who struggle to manage their finances in the modern world complain that we aren’t taught in school. And there may be some truth to that. Most programs focus on equipping students with the tools they need to be competitive in the workplace. What to do with the money they subsequently earn is often an afterthought at best.

As a young employee makes the transition to ‘adulting,’ to use the millennial parlance, they have to deal with a vast and complicated challenge in personal finance. It starts with basic budget allocation and paying the bills. But even at that level, you need to exercise restraint when it comes to discretionary spending.

You also need to understand why debt isn’t a solution, and paying off debts must actually be prioritized. Then you want to figure out ways to grow wealth. Perhaps that involves adding new revenue streams or getting acquainted with investments such as shares of stock, bonds, or mutual funds.

Thus, it shouldn’t come as a surprise that education is linked to financial management ability, and therefore economic outcomes. What is surprising, though, is that research disputes the merits of mandated programs to educate students about financial literacy.

Cognition drives outcomes

Education helps us to tackle the complex decisions and skills required to improve our personal finances. But financial literacy courses only show a significant improvement in a specific area: familiarity with financial products.

This knowledge is definitely helpful, but it’s only a small aspect of a vast undertaking. The more important factor that’s missing from these courses is a focus on actual cognitive ability. The study shows that this is what truly drives successful outcomes.

Couple reading through the contract

More years spent in school will increase the chances that you hone your critical thinking and have a mindset that’s open to learning. This is not a guarantee, but it’s a significant correlation. And it sets the foundation for you to attain subsequent milestones in your financial management.

You won’t just stop at balancing budgets. You’ll be more inclined to participate in the financial market through investments. This happens because you understand the risks and how to mitigate them.

Crucially, studies also show that cognitive ability improves aging and associated financial outcomes. You’ll be in better shape to continue making sound decisions on money matters even in your later years.

Parents are the ultimate mentor

Whatever kids learn in school or from other sources can contribute to their overall grasp of financial literacy. It all helps in the big picture.

Yet all of this can only heighten the role that parents play in improving their children’s financial outlook. We are their first and most influential teachers. We see their education and hold them accountable. And we set an example through our own financial practices.

And this is once again backed up by science. Recent research highlights the importance of financial socialization as a means through which parents impart such knowledge to their children. Particular emphasis is given to allowing children some hands-on practice in managing their money.

Kids are naturally inclined to learn interesting things like the features and specifications of their devices. But you can teach them how to save for such items. And even you know the purchase is ill-advised, let them make the mistakes now, while the stakes are low.

There’s nothing wrong with growing up to be a technician operating equipment. But why not equip your child with the savvy to be the person who buys a laser-carving machine, making decisions based on what’s profitable or expands business prospects?

Even as you learn better financial management skills for your own good, keep your kids in the loop. It’s the best way to set them up for future success as they face the challenges of not only earning money as an adult but achieving stability and independence.

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