Teach Your Children Well


Financial illiteracy has become an epidemic. According to a recent report from the National Foundation for Credit Counseling, more than 40 percent of Americans grade themselves a C, D or F on their knowledge of personal finance issues.

This illiteracy most often manifests itself in over-spending and under-saving. The average American household with at least one credit card has nearly $11,000 in credit-card debt. And the average worker saves just four cents of every dollar she earns.

In many ways, the financial crisis was spawned by this borrow-and-spend behavior. For much of the last decade, mortgage brokers and financial advisers told Americans to buy as much house as they could. And many folks listened, borrowing as much as the bank would lend them.

We’ve all since discovered that it’s not much fun when the country is financially maxed-out. To get back on solid financial footing — and to prevent another collapse — we need to get back to the tried-and-true formula of saving money on a consistent and disciplined basis.

That lesson should be taught from day one.

Unfortunately, most parents would prefer to speak with their kids about the birds and the bees than budgeting and finances. Yet, a 2009 Harris Interactive survey found that nearly all – 94 percent — surveyed parents of children under the age of 18 believe that parents are primarily accountable for educating kids about the importance of money and responsible spending. Furthermore, almost half – 42 percent — think schools should start financial education for kids before 5th grade, and most – 82 percent — think it should happen before high school.

Schools, however, aren’t picking up the slack. Educators haven’t prioritized financial education in the classroom, in part because standardized exams don’t test for it. Indeed, only 17 states require that students pass an economics class before graduation. Just seven require a personal finance class.

It should come as no surprise, then, that once kids grow up and head to college, they’re prone to financially irresponsible behavior and easily lured toward credit borrowing.

A major survey just released by the University of Arizona found that nearly three-quarters of college students had made a “risky” financial move in the last six months. Those moves included maxing out a credit card, not making the full payment on a credit card, taking out a payday loan, and paying a bill after its due date. Over 12 percent had engaged in four or more of these activities during that time.

Equally disheartening were the results of a basic “true/false” money management questionnaire administered by researchers. The average score was below 60 percent. These results are in line with other surveys of young adults.

Parental guidance turned out to be the major determinant of whether a college student behaved in a way that would lead to poverty or prosperity. In fact, researchers found that parental teaching had more influence than high school work experience and high school financial education combined.

So how do we fix this deficiency?

For starters, children need to be taught the “Pay Yourself First” principle. Whether it’s an allowance or a paycheck from delivering pizzas, kids should be taught to immediately deposit a preset amount of each and every check into their own savings account.

And kids should be able to spend their own money as they’d like. If your child blows it — say your teenage son spends all his money on some video games and therefore doesn’t have the cash to catch a movie with friends — let him live with his decision. It will be a valuable lesson, because as an adult, such overspending could be disastrous.

Giving our kids a degree of financial freedom will also allow them to experience the satisfaction that comes from successfully saving up for a big purchase. That can inspire a lifetime of healthy financial behavior. The discipline a child learns at age 8 when saving to buy a soccer ball will serve her well when she’s 17 and saving to buy her first car or when she’s 30 and saving up for a house.

Too few young people understand that wealth is something you earn through hard work and prudence.

To right the economy, we need to change the culture of spending in this country. That process starts early, with parents teaching their children how to save.