savings

How Parents Can Teach Kids About Money

Start with small steps and take advantage of teachable moments.

At a recent conference at George Washington University on financial literacy among teens, it seemed only fitting that a number of young people offered their own observations and testimonials. Among them was Andrew Bent, a student at GW, who gave full credit to his grandmother for piquing his interest in finance when she bought him 100 shares of General Electric stock.

The conference was called to announce the results of an international study conducted by the Programme for International Student Assessment (PISA), under the auspices of the Organisation for Economic Cooperation and Development (OECD). PISA tested the financial smarts of 29,000 15-year-olds in 18 countries (see How U.S Teens Rank in Financial Literacy). Although the conference generally focused on educational programs to teach financial literacy -- such as PwC’s Earn Your Future project -- I was struck by another recurring theme: Parents (and grandparents) play a key role in teaching kids about money.

Andreas Schleicher, director of the OECD’s Directorate for Education and Skills, stressed the importance of experiences outside the classroom. In particular, U.S students who had bank accounts scored appreciably higher on the exam. (A recent survey by BMO Harris Bank showed that 74% of parents with children under 10 had opened a bank account for their children or planned to do so.)

Ted Beck, president of the National Endowment for Financial Education, noted that a study being conducted by the University of Arizona has found that three factors have a positive impact on financial knowledge among college students and young adults: work experience, formal financial education in high school and, most of all, parental involvement.

Parent power. What if parents don’t feel comfortable talking about managing money -- or aren’t very good at it themselves? John Rogers, chairman of Ariel Investments, spoke to that question. Rogers is a founder of Chicago’s Ariel Community Academy, which focuses on teaching financial principles to inner-city students. He says the school involves parents by sending them newsletters that highlight what their kids are learning in class.

We at Kiplinger do our part to educate parents about money through Kiplinger’s Personal Finance magazine and Kiplinger.com. But remember that no matter how little you think you know about money, you always know more than your kids (see How Parents Can Be Financial Role Models).

Start with small steps and you can reap big rewards. Opening bank accounts for your children is a prime example. So is encouraging them if they want to start a lemonade stand or showing them how to compare prices at the grocery store (one of the areas covered on the PISA financial-literacy exam).

Teachable moments. My friend Melynda learned a few things herself last year when her twin daughters took a required course in personal finance as sophomores in high school (see How Financial Literacy Can Be Taught in Schools). The course convinced the girls that “credit cards are evil,” says Melynda, and she felt obliged to explain that credit cards can be useful if you understand the terms and pay the bill in full each month.

When her daughters studied a unit on the stock market and were asked to invest $100,000 in play money, one of the girls bought a single share each of a lot of different stocks. “She didn’t know it made more sense to buy round lots of a smaller number of stocks to save on transaction costs,” says Melynda. “We talked about how to decide whether a stock is a good buy.”

What’s most significant about this family’s discussions is that they took place at all. “Even the simple fact that parents ask their children, ‘How was school today?’ can be more important than any content area,” says Schleicher.

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