Trying to decide whether to buy a new shirt while shopping with my niece, she suggested I should “just put it in the basket!" The five-year-old's voice of authority urging me to pile the trolley up high was not a sign of greediness, rather it demonstrated the relationship children have (or don’t have) with money.
Learning how “three can be less than one”
Making smart money decisions can be challenging for even the old and wise. For children, concepts that adults take for granted are ideas that need to be learned.
The seemingly simple activity of saving up for a new toy (or a new shirt), for example, requires a child to understand the meaning of exchange, have a sense of their future self (and the relation to their current self), practise delaying gratification, understand the concepts of now and later, have good counting skills and understand that denominations represent value (it can be tricky explaining that three pennies is less than one pound even though three is more than one).
In addition, under-eights are not yet able to distinguish effectively between wants and needs, according to a May 2013 publication by the Money Advice Service. My reluctance to purchase the shirt was because although I wanted it, I couldn’t rationalise to myself that I needed it. For children under eight years old, this distinction isn’t so clear.
Learning from doing what I do
A growing body of research has been exploring the effectiveness of formal financial education across a range of ages and into adulthood. In January 2014 alone, two major studies were released – one finds that many traditional financial education initiatives have virtually no effect on financial capability and another for the World Bank finds they tend to improve some skills (saving and record keeping) but not others.
Simply providing information is not likely to be enough to teach young children about money issues, partly because they lack the context to apply the information.
Children learn through imitation (copying others) and induction (noticing patterns in experience), explain authors of Money Advice Service research Dr David Whitebread and Dr Sue Bingham of the University of Cambridge. Because children naturally imitate the people around them, they can pick up financial behaviour and decision-making from adults.
Research cited here suggests parents are also the key source for information for high-school students and that parents’ saving behaviour influences that of even their adult children.
Learning through pocket money and chores
Giving a child pocket money for chores can help with counting skills and create a situation in which to learn about concepts of income and work, according to research presented at the Royal Economic Society. The findings also suggest that habits learned in childhood appear to have long-lasting effects in terms of financial behaviour and decision making in adulthood.
Furthermore, academics in Italy also report that pocket money is linked to an increased likelihood to save as an adult.
Learning through waiting
To help lay the foundations for healthy saving behaviour, it might pay to teach children strategies to help them delay gratification. For example, help them to shift attention from the rewards to the actual process of waiting.
As described in eZonomics article Why trust is important for marshmallows and investments, people are more likely to delay gratification if they trust their reward will eventually come. To that end, providing a stable, reliable environment (so the child has faith the future reward being saved for will indeed eventually be available) may be helpful.
In a similar vein, Sarah Brown and Karl Taylor of the University of Sheffield found that, for older children (aged 12-17) in the United States, pessimism about their future life and education was linked with a lower level of savings than youth with brighter expectations.
Learning from hitting the shops
Finally, situations where children can learn by doing are shown to be very powerful. It might be as simple as letting a child hand the money to the cashier at the ice cream counter and accept the ice cream cone in return. This teaches about the concept of exchange and helps reinforce that money can only be used once - it doesn’t get returned once it has paid for something.
Another idea is to include children in the household shopping. Again it provides an opportunity to practice many of the skills and concepts and provides a fitting setting to discuss the difference between wants versus needs.
But watch out: if your young shopping companion is as persuasive as mine was, you may find some of your “wants” making it to the check-out.