Financial planning skills are best learnt from parents, not at school
Posted by: Uma Shashikant on Jul 30, 2018, 06.30 AM IST
By Uma Shashikant
Including personal finance in school curricula is a favourite idea of many. They believe children should learn financial concepts at school to be better with money as adults. Despite being a teacher of finance, mostly to adults in the financial services profession, I find it difficult to advocate this view.
A school has its role in shaping the child, and the parents have theirs. While the child picks up language, math, science, arts and sports at school, apart from implicit skills of social behaviour, structure and authority, the life skills are quite in the domain of the household. Appreciating nature and the outdoors, eating a balanced meal, growing a garden, learning about one’s body, and understanding how to use money are skills, I believe, that parents have to teach. These skills are learnt from parents who impart it through their behaviour, through family activities and decisions that provide learning opportunities for the child.
The Money Advice Service, UK, in collaboration with Cambridge University, has been conducting several research projects about developing financial capability in children and young people. In the publication, ‘What drives financial behaviour?’ (April 2018), they provide a very useful framework. They classify the enablers and inhibitors of financial capability under three heads—ability, connection and mindset.
Ability refers to the knowledge of financial products and concepts about money and financial numeracy. Connection refers to engagement and access to money and money transactions. Mindset refers to values and attitude towards money, such as saving, confidence, understanding money’s value, and the financial position of the household. Unsurprisingly, ability is not a driver of behaviour with respect to two key capabilities: day-to-day money management and active saving behaviour.
Teaching children financial concepts and products has no significant impact on how they managed their money or made simple decisions with money, or on whether they developed a saving habit. These key financial behaviours were influenced by the connection and mindset factors listed above. The responsibility for nurturing the right attitudes about money lies primarily with parents and not with the school.
What can parents do? The study shows that money habits are formed in children by the time they are seven years old. Children learn from several activities that help them connect how money works in the household, and parents can enable this through active involvement and encouragement of children in making simple decisions. For example, a child who is handed over some money to go and buy a fruit for herself, will find the experience of looking up the prices, making a choice, paying the money, counting the change, and enjoying the fruit a strong experience that enables connecting with day-to-day financial decision-making.
Knowing that money is a limited resource and that it comes from pursuing a job is an important learning for a young child, compared to the simplistic assumption that money comes from the ATM and swiping the credit card can buy anything. Children learn by observing how parents speak and behave. Ensuring that family conversations involve making joint money decisions, and involving children, are found to be valuable.
While planning a holiday, working with a broad budget and making decisions about how the money will be allocated to various heads enables children to understand opportunity costs. It also makes them feel informed and empowered about the decision the family makes on the holiday. To see that taking a bus instead of a taxi from the airport enables spending on extra scoops of delicious local ice creams provides the children the capability to connect how considering alternate uses for money is important in managing it.
Attitude to a financial situation is developed from the decisions that the family makes and the experiences children have in participating in such decisions. Households that exhibit anxiety when money runs short; households that are resigned to accepting that their money situation will not change; households that are wary about borrowing; and in contrast households that are nonchalant about borrowing are all implicitly imparting attitudes towards money in the minds of children. Confidence about managing money comes in when parents are able to actively demonstrate how to make difficult decisions with a limited resource.
The nightmare of a young child kicking and screaming in the toy section of a store is something most parents will identify with. It seems a tantrum ends up working in the child’s favour. Emotional intelligence and delaying of gratification are values taught primarily by parents, who make the conscious decision to do so. Psychologists conducted an experiment in which they told a group of young children that the primary purpose of one shopping trip was to buy a gift for a friend’s birthday. They handed over the budgeted money to the children, discussed the amount to be spent, considered the choices, and then allowed the children to walk through the aisles to make a choice. While children in the experiment were tempted by the toys they saw, they were reminded that the current purpose was not buying something for them, but for the friend. Advance notice that they won’t be getting anything for themselves, kept the children on track.
Values are tough to impart unless they are lived by the household and reinforced consistently over time. Children have an innate sense of fair play and learn by observing whether parents seek instant gratification or are able to wait and postpone a decision. Planned postponing of money decisions has been shown to have a strong influence on the mindset towards money.
Actually handling money, however small it is, and making choices have a lasting impact on building financial capability than conceptual orientation towards making the child figure how a bank works. The Money Advice Service’s study showed about 40% of the variation in financial capabilities came from connections and mindset factors.
Older children understood financial concepts such as compounding quite well. Given a goal, many children took it upon themselves to earn, save and set aside money for a specific game, toy or gadget that they wanted to buy. They also understood deals, discounts and bargains.
Conceptual knowledge is mostly contextual. When a decision about taking a housing loan has to be made, understanding how the EMI is computed, how fixed and floating rates work, how a loan should be compared to income, are all important elements of financial literacy to know. Placing these in a school curriculum several years before that decision, may not achieve much.
(The author is Chairperson, Centre for Investment Education and Learning)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)