Key points
- The top source of financial learning comes from our parents.
- Teach your kids that money does not grow on trees.
- Teach your kids that money comes from providing value to others.
Observational learning is a type of learning where individuals acquire new behaviors, skills, or mindsets by watching and imitating the actions of others. Perhaps the most universal and powerful form of observational learning occurs between parent and child, in which children naturally and spontaneously learn to model the behaviors of their caretakers.
When it comes to personal finance, most people are street smart rather than book smart. Learning occurs socially rather than formally. Early on in life, we observe the financial decisions our parents make for themselves and for the family during the time period between the cradle and the college dorm. Ask yourself whether you derived answers to the following questions from your parents:
- How often should I dine out versus cook meals at home?
- What kind of car should I buy?
- What does a vacation look like?
- Where do I shop for clothes or groceries?
- Is there a career my parents have in mind for me, or is this completely up for me to decide?
Children believe that money grows on trees early in life, and indeed it does. Children receive toys, clothes, and food effortlessly from the love and support of their parents (or Santa Claus). As the sponge-like childhood brain develops throughout adolescence, children begin to observe the behaviors of their parents. Upon entering the teenage years, kids pick up on how their parents spend their time and money. Why is Mom never home from work until after dark on weekdays? Why is Dad working on his computer on the flight instead of watching a movie like everyone else? Children see parents sacrificing their time or happiness for work in an entirely different way than they operate themselves.
Children understand that material goods (toys) and experiences (vacations) may bring happiness, but it takes an extra layer of development to realize that money is the intermediary between goal aspiration and goal fulfillment. A practical tool parents utilize is allowances, or paying kids money to do work around the house, to develop an understanding of the link between effort and compensation. Encouraging children to hold a job in high school or college provides yet another example of establishing a practical and hands-on understanding of how money is earned. Both examples underscore the mindset of providing value to others as a tool for financial compensation. When a child mows the lawn to save the parents an hour of time, this provides tangible value. When a child stocks the grocery shelves for a local grocer, this provides tangible value.
Providing value to others is a comprehensive, if not unavoidable, principle of economics. The earlier that children learn this principle, the better. In addition to providing value to others, parents should open dialogues with their children about practical financial concepts like managing a budget, building their credit score, and investing for future long-term goals. Strong financial habits, including saving money and investing, are private behaviors that your children may never observe unless you deliberately convey them. The impetus of teaching personal finance often falls on parents since the subject is not standard in the educational curriculum.
Talking about money is taboo, and this can mean difficult financial conversations simply never get discussed until consequential and unavoidable expenses arise, like who will pay for the child’s first car or who will foot the bill for college tuition. Rather than waiting until pivotal moments occur, parents should develop an open and proactive mindset when broaching the subject of personal finances with their children. In a society that is financially strapped and money-illiterate, having candid conversations with your offspring about financial sacrifices, mistakes, or triumphs you have experienced throughout your life can make all the difference.
