This is a repost of a blog I wrote six years ago. Sadly not much has changed.
Parents expecting financial education classes to teach their children about personal finance are going to be disappointed after reading a recent Survey of the States. We might even say that financial education classes are failing our kids.
The 2018 Survey of the States shows that there has been little increase in economic education in recent years and no growth in personal finance education.
What is the problem? We know that schools impart knowledge about economics and personal finance. However, schools cannot provide the necessary hands-on experience that leads to money management success.
Driver’s ed vs financial literacy
Let’s compare financial education classes with driver’s education. Every teen knows that before you can get a driver’s license one has to take the classroom course. This is where potential drivers learn the rules of driving. Students develop a knowledge base about the rules and regulations. However, memorizing the motorist’s manual does not make one a skilled automobile driver.
As a result, teens can’t wait to get their hands on the steering wheel. For a teen the learner’s permit is where the rubber meets the road. All states require some prescribed amount of supervised hands-on practice.
After completing the behind-the-wheel portion we can then believe that a teen has knowledge and a degree of hands-on practice before we let them drive on their own.
As with learning to drive a car there are two parts to financial education, knowledge and skill development. Schools no longer provide automobiles for driving practice. And certainly schools would never consider offering real money for money management practice. So where does a kid get money experience?
The missing piece in financial literacy classes
Hands-on practice. Here’s where parents can step up. Parents are the only ones who can provide three equally important elements for their kids to learn money management: money, responsibility and control.
The main ingredient in allowance is money. Through as system like “The No-Cash Allowance” parents can provide a reliable, consistent process for their kids to receive, spend, and transfer money. The kids keep track of their money as a number in an account, initially kept at home with parents as banker.
Spending money is easy. Yet spending is not the same as managing money that exists as a number in a financial account. This is the future reality for your children.
Giving kids responsibility for certain expenses sets the stage for managing expenses as an adult. Parents and children agree on expenses that are relevant to the child. These can include school supplies, some clothing, entertainment, and cell phone. A child is now managing his money for both fun and necessary expenses.
As difficult as it may be for parents to accept, it is essential for kids to have full control of their money. Consequently, kids make both good and bad decisions, learn from them, and go forward.
A $10 spending mistake by a kid will be a big learning experience. A $1000 spending mistake by an 18-year-old can be a financial disaster with lingering consequences.
Kids need hands-on money practice
By providing all three elements a child has their own version of real-world experience. Because the allowance is documented there is a history. This written record eliminates confusion about allowance transactions.
Such a financial education can begin even before a child starts school. A child who starts early can have ten or more years of practice with money management in the safety of the home. Money, along with having total control and responsibility gives kids practice developing money management skill.
Knowledge alone is not enough when it comes to money. Kids learn through practice using their own money. This is what behind-the-wheel practice does for young drivers.
Whatever a kid might learn in school about credit, interest, loans and investing is, in his eyes, not relevant to his own money. School learning often stays in school.
Unfortunately, financial literacy classes do not provide hands-on practice in the classroom. It’s like learning to play soccer without ever kicking the ball.
For all parents the day will come when they give their kid the car keys for that first solo drive. Likewise, parents can give their kids the keys to learning the essential life skill of money management.
Lynne Finch helps parents teach their kids about money in a society that is using less cash than ever.“It’s time to teach the kids how to manage money they can’t see or touch,” says the author of The No-Cash Allowance. Follow Lynne’s common sense approach for teaching children that money is a number starting in pre-school and continuing through high school.