When I was a little kid, my approach to money was simple. I kept an eye out for pennies on the ground as I walked to school. With a bit of luck I could find 10 pennies — enough to buy one package of O-Pee-Chee hockey cards (eight to a set, plus a stick of stale pink bubble gum).
Most kids I grew up with were as carefree about money as I was, and our parents didn’t worry a bit. They figured that life would eventually teach us everything we needed to know about mortgages, car payments and the like. But that’s no longer the case. In an age of ETFs, TFSAs, RESPs and a dozen other acronyms, more and more people believe we need specialized education in how to manage our money. Every day I read of another politician demanding that our schools teach financial literacy.
It sounds like an excellent idea. But there is no evidence that a classroom can turn people into better savers or investors. Lauren Willis, a professor of law specializing in consumer finance at Loyola Law School in Los Angeles, says numerous studies have demonstrated that high schoolers who’ve taken personal finance classes are just as likely to bounce cheques or miss a credit card payment. Financial literacy courses can actually hurt students by making them overconfident about their ability to make financial decisions. And there’s no guarantee that a bit of education about today’s market will prepare kids for the next wave of financial come-ons. “A lot of personal finance stuff becomes irrelevant fast,” she says.
One reason that financial literacy courses fail is because most financial decisions are emotional. You can’t teach kids to be good savers and smart investors the same way you teach them algebra or chemistry.
Lewis Mandell, a professor of finance and business economics at the University of Washington who has studied financial literacy for 40 years, says kids learn best about money when they actually handle it — without their parents stepping in to correct every blunder.
Mandell believes that giving kids an allowance is stupid: “It’s like putting them on welfare.” His studies show that kids who get a regular allowance score worse on financial literacy tests than those who don’t get one.
Here are a few good ways to give your kids the financial experience they need:
Buy them a stock
Some schools try to teach kids about investing by staging stock market competitions that allow them to compete against other students using fictional money. All that does is to encourage kids to take unnecessary risks to come out on top.
Letting them play the stock market for real teaches much more useful lessons.
Mandell gave his daughter control over her college fund when she was a teenager. The fund had been invested in shares of Southwest Airlines, the budget air carrier. Mandell’s daughter thought Southwest was boring and after seeing a TV ad for Pepsi she decided to invest half her money in the beverage maker. Southwest’s shares kept rising as fast as its airplanes, but Pepsi stock fizzled, dropping nearly half. Mandell’s daughter learned that the stock market is volatile and you should do your research before buying. “There’s no way she could have learned that in a high school class,” says Mandell.
There’s nothing like running a business to teach them responsibility. Once I realized my portfolio of hockey cards wasn’t going to make me rich I turned to cutting lawns to save money for college. I started off with one client, then got another, and another and another. If I wanted more money, I had to work harder.
Running a business teaches you not only to manage your money but your time. Soyeon Shim, a professor of consumer and family sciences at the University of Arizona, says kids who are better time managers are also better budgeters.
Give them credit
Most parents abhor the thought of children heading off, credit card in hand, to university. I disagree. Just as kids never learn to ride a bike if you don’t let them fall, they won’t understand late payments and sky-high interest rates without experiencing them.
To make sure your kids don’t go bankrupt, suggest they keep their limit to $500 or so. But resist the temptation to co-sign for the card. If your kids rack up huge bills, it’s their responsibility to pay them off. That can be a painful lesson, for sure. But unlike a classroom lecture, it’s a lesson they’ll never forget.