Are we giving our kids the right financial education?

I received a strange phone call last week. A parent wanted to know if I could attend her son’s 10th birthday and speak to the group about finance and money. She was convinced that it was the right time to teach her son about money and sounded earnest. The call had a flood of ideas rushing to my mind about children and money. Most parents are righteous and earnest, but wrong. Where are we going wrong and how should we teach kids about money? Many parents begin their children’s financial education with pocket money. They ask the child to do household chores to earn money. Budgeting and maintenance of accounts follows. Then there are conversations about what was spent, how, and what could have been done better. These are like classroom role-plays and simulation. They look deceptively educational, but do not apply in the real world at all. The child may learn a bit of math, or portray short-term enthusiasm about chores, but learns little else. In the real world, being the good boy who keeps a budget and accounts can be of little use. One manages a dynamically changing personal balance sheet, where income is at risk with the job, expenses are not always controlled, and liabilities pile up before assets. This show is actually playing in the parent’s life, away from the children’s view. Then there are others who take the math-physics approach to money lessons. They put the kids through books and texts about how banks work, how time value is computed, how mortgages are priced, and how taxes are paid. This is sometimes taken to the fine art of prescribing a syllabus and creating an exam. If we do not know what to do with the Pythagoras theorem or the structure of atom in our adult lives, we are equally unlikely to apply the knowledge about internal rate of return and net present value. We use money every single day of our adult lives without much theoretical knowledge and are actually not worse off for it. Imagine the horror some people would have to endure if they were told to understand how a car works before they could drive it. We need an understanding of the basic principles, but we have to make it practical and relevant while we are at it. Learning to manage money is part of the ‘personal responsibility’ equation. We learn to manage our health, food, attire, time, attitudes and so much that we like to be incharge of. How we take charge of ourselves reflects in the way we behave and sends out important social signals. Money is part of this equation. Our children learn from home, school, friends and society to become the kind of people that they do. They learn about money, too, in informal and intuitive ways over a period of time. Parents can help this growth if they include money in the family conversation, not in the school curriculum alone. There are three broad levels at which children should learn about money. The first high-level knowledge is the wonder about how money works, the amazement of value addition that is possible when money is used to bring things together and create something that is more than the sum of its parts. They should be familiar with the ideas of market, trade, prices, competition and fair play, and the dynamics of innovation and enterprise. Our kids should begin to think about money as a reward for risk, not as payment for a job. If children’s minds are freed from the rigid and rule-based thinking about money, we are bound to have more innovation and better economy for everyone. The second level is the practical one about making decisions regarding money. Our financial lives as adults largely depend on how we are able to allocate the finite money at our disposal when it has multiple uses. If we spend on one item, we would have little for another. Sensible financial decisions are made when adults manage to evaluate their choices well for both short- and long-term implications. Research shows that our attitudes about money are part of our psychological makeup as a person, our need for approval, and conditioning during our years of growing up. Parents love the idea of emotional intelligence, but they give in to children’s tantrums and tricks at the mall. How about allowing the child to spend a specific amount of money and turning the choice over to him? Research shows that this approach helps. The child with a finite amount of money in hand and freedom to choose learns to evaluate. Learning to make choices is easily the most important money lesson for anyone, not just the kid. It is the application of financial literacy in everyday life. The third is the operational level of knowhow, which should cover the basics. This is the financial literacy package, as we know it—a fundamental understanding about how to make a deposit, take a loan, make an investment, manage paperwork and understand how personal financial balance sheets work. I would recommend this at the start of their careers, to everyone before they get their first pay cheque. This portion of teaching finance is easily implemented, but is also easily forgotten. To be useful, financial literacy has to be contextual. Reliable information and knowledge about how to use it are sought by people mostly before an important financial decision can be taken. Someone who is opting for a home loan will take out time to understand the EMI, its computation, comparisons, home loan insurance, prepayment penalties and tax concessions. Packing this into a financial literacy course and administering it to children years before they take a home loan might actually be a waste. Everyone should know about money and personal finance. It’s just that there is no way to learn it all through a course, front-ended before the financial life begins, and robust enough to apply all through our lives. Children will take their first lessons about money from parents. How we manage our skills, jobs, loans, expenses and our money lives will leave them with enough information and insights. Most parents actively hide their money lives even from their grown-up children and refuse to discuss financial matters at home. Change can begin there, before we search for financial literacy workshops. Source: Education News