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When Families Talk Openly About Money, It Pays

Chloe Niu, Wharton Student & FMFCU Intern
Children deposit saved coins into Coin Counter at Franklin Mint Federal Credit Union

Saving, spending, sharing, and earning are four simple words essential to greater objectives like success and independence. According to KeyBank, 76% of college students wish they had more help to prepare for their financial futures. Unfortunately, by the time students complete their academic educations, many are falling behind in financial education. Parents are often left scratching their heads, wondering how better to teach financial responsibility.

Some believe education is best taught through experiential learning rather than the advice of a mentor or peer. In a financial setting, however, it is best to be forewarned about spending more than you earn to avoid falling into debt.

An experiment conducted by Ambuehl, Bernheim, Ersoy and Harris (2017) focused on the often-overlooked role of communication in financial literacy. In the experiment, participants individually answered a set of compound interest questions. Next, one group of participants was randomly paired together; this group discussed how they would answer a set of compound interest questions before answering the questions separately. A second, separate group of participants received the same set of problems. They solved the problems individually, with no communication.

The results? The first group, which discussed the questions, performed better even though both groups had not been given financial education. Just a few minutes of talking potentially could have changed someone’s financial future. The study concluded that communication is a vital criterion in better financial decision-making. That’s why family communication about financial ideas is invaluable.

Not to worry, you do not have to explain compound interest to your elementary schooler. Franklin Mint Federal Credit Union (FMFCU) came face-to-face with this problem and spearheaded initiatives to educate children about fiscal responsibility. FMFCU partners with local schools and community organizations to deliver financial educational and support academic programs like Delco Hi-Q, the nation’s oldest, continuous academic quiz competition; Excellence in Teaching Awards; The Berenstain Bears Financial Literacy Program; Financial Fitness @Work; Personal Finance 101; Identity Theft; and more. FMFCU realized that financial education doesn’t have to consist of discussing mortgages with six-year-olds. Financial education can be as easy as teaching children to save allowance for a coveted toy. Also, the sooner financial education begins, the better. Studies show that children who form responsible money management habits early are more likely to be fiscally responsible in adulthood. (The Associated Press, Begin Teaching Kids Money Management Skills Early. nytimes.com)

Your talks should begin with something familiar to your child. How about that desired new computer for sale? At first, your child might not understand why he cannot have that new computer. Take time to explain spending and saving options available, and why the computer is not one of them. The concept of spending and saving may be a little hard to understand at first. So, begin by describing the benefits of not spending all your money at once. Perhaps explain why it’s important to save for an unexpected expense, like fixing a flat tire. Or maybe your child wants to save up for a new phone. Equate savings to a favorite toy—it’s comforting to know that it’s there.

Introducing your child to the concept of an allowance provides first-hand experience with managing money. Allowance can be considered a child’s first paycheck. Kids become familiar with saving, budgeting, and earning money—all preparation for the future. It is best for a child to experience money management on a small scale before being introduced to the real-life scale. Handling an allowance at a young age means that any financial mistakes your child makes will have minimal impact. Such mess-ups can teach meaningful lessons long before your child is holding a paycheck.

Saving, spending, sharing, and earning—four key words that comprise the foundation for a solid financial education. Build them up slowly. Lead your child encouragingly and explain each step of the way. When your child is finally poised for the future, you can rest assured that there will be solid financial footing underneath.

Ambuehl, Sandro and Bernheim, B. Douglas and Ersoy, Fulya Y. and Harris, Donna, Social Transmission of Financial Decision Making Skills. A Case of the Blind Leading the Blind? (2017). Rotman School of Management Working Paper No. 2891753.