Teaching children financial literacy is important, yet it is not the complete solution. The only way children can avoid making mistakes with money is by becoming financially competent, a skill that is not developed in the classroom.
No one can predict the financial future. As parents look at the fallout from the current financial turmoil they see troubled economic times ahead for their children. But when everyone is perplexed as to what to do, how can parents prepare their children for what lies ahead?
In today’s economy, it is even more important for our children to grow up to be financially independent as adults. Children who learn to manage money will be able to survive in an uncertain financial future. Parents who help their children learn financial competency through hands-on practice at home will not need to bailout their adult children, thus protecting the parent’s own savings and retirement funds.
We somehow believe that teaching financial literacy will save our kids from economic pitfalls. Yet, knowing about financial matters will not help our children learn to manage their own money. Literacy is knowledge. Competency is skill. Financial competency requires practice, something that cannot and does not happen in the classroom, simply because schools can’t provide real money in the classroom. Only parents can do that. To become competent in managing money a child has to practice with real money.
I counsel parents to transfer to each child a regular amount of money. Parents can say to their children, “This is your money. You are responsible for certain expenses. And, by the way, if you manage your money well you’ll have more to spend for fun. You are in total control. You will make good and bad decisions and sometimes will wish you had made different choices. As your parents, we can offer advice if you want it but don’t look to us to bail you out. Learning to manage money is important.”
Parents need to bite the bullet and give up control. Remember when you removed the training wheels from your child’s first bike. You expect some falls and scrapes, but with practice you knew your child would succeed. However, when it comes to money, most parents won’t or can’t give up control. Just like learning to ride a bike, your kids will not learn how to manage money as long as you remain in control of money decisions.
Managing money is a combination of knowledge and practice. One without the other is ineffective. The ability to control one’s money provides the power to make choices. When we help our children develop financial competency through hands-on practice, they will be ready to navigate the economic challenges that lie ahead.
Do you know what your children learn in financial literacy classes? That’s the topic of my next blog post.