By the time your child is three, he or she will probably be able to pedal a tricycle, get dressed, and put together a multiple-piece puzzle, among many other actions that the Centers for Disease Control and Prevention refer to as “developmental milestones.”1
(Unsurprisingly, given the digital age we live in, they even offer an app parents can download and use to track these major benchmarks).
So why do we, as parents and as a society, wait so long—often into the teenage years or even later—to introduce our children to the positive behaviors that lead to financial well-being? Why isn’t financial competency included among a child’s developmental milestones? Part of the reason may be that we seem to have a collective blind spot about seeing children as competent financial actors, capable of the skills and mastery that we witness them achieving in so many other areas.
While age three might seem premature for talk of stocks and bonds, it’s actually a good time to start helping your child learn positive behaviors like self-control and delayed gratification that relate to financial well-being down the road. My co-author Charles Kalish, a professor in the Department of Educational Psychology at the University of Wisconsin–Madison, and I wanted to take a closer look at what drives financial well-being in the three to 21-year-old age group. Can this type of financial competency be developed over time so that these behaviors and practices are solid by the time children reach adulthood?
Developing a three-part model
Our study is unique because it is one of the first to take a much broader lens on the development of financial capability. Looking at the whole—incorporating our values and attitudes about money—allows for a more comprehensive picture of finances and financial behaviors than what we would glean from examining just one small area of a much larger topic.
After an extensive review of the research in developmental psychology, consumer finance, and education, we framed our thoughts and findings in the context of work done by psychologist and economist Daniel Kahneman. Kahneman describes a two-part system that humans use to learn and make decisions: System 1 actions don’t require a lot of careful, intentional thought—they’re essentially what we call rules of thumb. You’re not preparing a spreadsheet or creating a pros and cons list; these are simple decisions that are second nature. System 2 actions take mental effort; they involve thoughts and procedures. Most financial literacy programs target these System 2 decisions.
Drawing on Kahneman’s decision-making work, we then created a three-part model. The model allowed us to define and categorize, as well as group by age, what we were seeing in the research review:
- Executive function development: Developing the cognitive abilities that influence impulse control and planning, key for children ages 3-5.
- Financial socialization: Acquiring financial norms, values and attitudes, critical for children ages 6-12.
- Financial knowledge and experience: Gaining skills in making financial decisions, central for teenagers and young adults ages 13-21.
Incorporating scaffolded practice
Central to our study and throughout each age group bracket is an understanding of the importance of what we call scaffolded practice. Because we know that knowledge doesn’t automatically translate to behavior when it comes to human beings—we can grasp intellectually that smoking is bad for our health, for example, but it doesn’t mean we will apply that knowledge immediately to our lives—we can gradually build our financial skills and self-efficacy through hands-on, ongoing incremental practice.
Financial capability by its very nature is applied; we are continually apprenticing, learning by doing, by making consistent, active decisions. If children have adults in their lives such as family members or teachers who can support them during this experiential learning process, they can continue to grow and ramp up their financial skills and financial well-being at each developmental stage.
Strategies for the future
With this notion of scaffolded practice in mind, we suggest three strategies to help build financial capability in young children and youth:
- In our research, we found that executive function can be strengthened in children at an early age, starting in the first five years of life. Adults can help children ages 3-5 bolster their executive function, which leads to later positive financial behaviors like budgeting and delaying gratification. Giving children a role in planning and assessing their own learning at this age leads to a greater sense of achievement and self-efficacy.
- Children ages 6-12 learn through watching their peers and family members navigate financially as well as through specific instruction. It’s important to combine approaches with oversight and engagement: a well-intentioned plan such as giving a child an allowance will not have the same impact on savings behavior if a parent doesn’t follow through with interaction and discussion about the process.
- As children become more independent, ages 13-21, parents can look for hands-on opportunities for financial learning and practice. Teachers can provide learning experiences such as computer simulations, role-playing, or even basic budgeting exercises that help build their money management abilities.
Finally, we wanted to be very careful throughout our study about the signal we were sending to parents. Many parents and teachers already feel uncertain about their own ability to manage their finances; the last thing we wanted to convey to them is “my kid can’t.” Everyone is a financial actor in the sense that they are making money decisions on a daily basis, and if you have children, they are probably already observing these actions. Our framework and guidelines are intended to encourage parents, not to intimidate or limit them.
Read the essay “From Impulse Control to Interest Rates: Building Financial Capability in Children and Youth” from the book, What It’s Worth: Strengthening the Financial Future of Families, Communities and the Nation.
Elizabeth Odders-White is an associate professor in the Department of Finance, Office of the Dean, and the Kuechenmeister Bascom Professor in Business at the Wisconsin School of Business.
1 “Important Milestones: Your Child By Three Years,” Centers for Disease Control and Prevention