The third element to help your kids develop financial competency is money behavior. In the previous two blogs, I wrote about knowledge, learned in financial literacy classes; and skill, developed in home starting in preschool. Many studies are emerging about the psychology of money that examine our behavior and habits.

Financial competency includes knowledge, skills and practice, along with behaviors and habits that allow an individual to make informed decisions regarding money.

Financial competency includes behavior

Success with money isn’t about knowledge, IQ or how good you are at math. It’s about behavior. Understanding the Psychology of Money

Kids start developing financial habits before they even start school, years before taking a class in school. Researchers at the University of Wisconsin–Madison report that by the age 3 most kids are able to understand the basic concepts of value and exchange that are central to economics.

Money behavior starts early

By starting allowance early, your kids will have years of money practice that can help them develop good money behaviors and habits. Unfortunately, we generally give kids money with little or no responsibility.

As a result, we enable them to be spenders. After all, getting money as a child is easy–someone gives it to you–no strings attached. Now, when was the last time that happened to you?

Not only do parents encourage spending, our entire consumerism culture is in on the act.

And parents are up against what Vince Shorb, CEO of the nonprofit National Financial Educators Council, called “psychological warfare” in the form of toy advertisements, peer pressure, and social media. They are all bombarding children with messages encouraging excessive consumption and a spendthrift attitude. 

Knowledge is not financial competency

Here’s an example of financial literacy class failing because it focuses on fact and figures while largely ignoring behavior.

J. D. Roth, on his website Get Rich Slowly, explains why with his story. Roth took the class, aced every test, but five years later had a debt habit. When he started applying psychology to made changes in his behavior to pay down his debt. He says, “It’s not a lack of knowledge about compounding and credit cards that holds us back, but a chain of bad behavior.” Why financial literacy fails and what to do about it

We know that teens need knowledge from driver’s ed class, skill from behind-the-wheel training. What they develop as driver’s is behavior and habits. Bad behavior as a driver include, speeding, not signaling, ignoring traffic signs, using mobile devices, and not maintaining insurance.

Bad habits developed through money behavior can create financial struggles.

• Not keeping good financial records
• Buying because of peer pressure
• Not paying bills on time, incurring late fees and interest
• Wanting something advertised just because
• Impulse purchases

The strategy as explained in my book can help your kids develop skills and behavior during those formative years in your home. The solution is to give your kids money with control and the responsibility to manage it all by themselves. Read the Overview

When kids don’t have spending responsibilities, e.g. kid-sized bills to pay, they continue to develop the habit of consumer spending influenced by peers and marketing. 

An average US teen spends $2,331 per year, according to Piper Sandler’s Fall 2022 survey.

Teens are big spenders, yet, because they live at home they are sheltered from the financial realities of adulthood. Their free-spending habits may not work well when they become adults financially responsible for all their money decisions.

To give kids spending responsibilities, you assign age-appropriate expenses as explained in my book. For example, transfer funds to your child’s account to buy their school supplies, starting in Kindergarten. This is their day job and something they can be responsible for. Increase their funding and responsibilities based on age and expense needs.

Behavior that creates habits using The No-Cash Allowance

• Paying expenses on time
• Deciding to not spend (save)
• Accepting results of decisions (mistakes)
• Becoming smart consumers,
• Planning for future spending
• Know how money available at any given time
• Keeping accurate records to review with parents
• Review log of past transactions

Being a smart shopper is the first step to getting rich. ~ Mark Cuban

In addition, kids will develop decision-making skills as they plan for their immediate future. For example, they can review at their account and decide not spend now so they can have more for next week for (whatever).

Most kids can’t plan beyond the upcoming weekend, so saving money for a distant future may not be the best use of their money decisions. Short-term saving provides a short-term reward for kids that reinforces the habit of not spending, the whole idea of deferred gratification.

Understanding what financial literacy is (and is not) a subject worth more than one blog. You are reading the third of a three-part series.

Part 1: How financial literacy classes place cart before horse in two important ways

Part 2: How to help your kids develop money skills to last a life time

Part 3: This blog: How to help your kids develop financial competency as they review their money behavior

Allowance Anecdote: A seven-year-old who starts a no-cash allowance today will have 10 years of money management experience before high school graduation.

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Give your kids money with responsibility and the control to manage it all by themselves.