There was an article in MSN Money over the Christmas holiday – Why Teens Fail at Managing Money – with the premise that teens are ill-prepared to survive in the modern financial world. Several individuals quoted in the article believe that all high schools should be mandated to teach a personal finance course; thirteen states presently require that high schoolers receive such a course. But there’s significant blowback from educators who cite the cost involved and also the simple fact that they believe themselves ill-prepared to adequately teach the material. The truth is that personal finance isn’t just a series of techniques about cash flow management and financing calculations; how someone handles money is ultimately a function of not only what they know about money, but their values. Values aren’t derived from discrete lessons at specific points in time, but from immersion. The academic view is that money serves both as a medium of exchange – thereby eliminating the need for barter – and a store of value. In a sense though, how we use money is a store of our values and that comes from immersion within the family.
Both money and debt are tools, as much in their way as a screwdriver or hammer. But if you give a child a hammer or screwdriver, you see that things don’t go the way that the kid expects. Nails are bent to hell and back and learning how to drive a nail straight requires a degree of practice that only comes with time. Kids also tire of the repetitive nature of constantly turning a screwdriver and after some turns, will usually look at you with an okay, can you finish this and we’ll move onwards expression. The upshot is that any skill, let alone mastery, will only come with time. It’s a bit absurd to think that giving a kid a course in personal finance in high school will provide them with the requisite skills to successfully manage their finances. Knowing how to budget is only a fraction of the battle if the discipline to maintain it isn’t there, and the constant effort to blur need and want makes it problematic. One of my taglines when I hear the kids mention wanting something is yep…need, want. That ability to discriminate can only come with constant reminders and conversation and those won’t come in schools.
It’s also important to know when to use the specific tools and that comes with experience as well. There’s a telling quote from a father within the article, telling in that it gives a glimpse of present attitudes about spending and debt. The father comments that his teen wouldn’t know about how to finance the purchase of a computer. My first thought was to wonder why he wasn’t sitting down with the kid to examine how to finance a computer purchase. But the next thought was to wonder why a computer would have to be purchased with credit anyways. Kids are deeply susceptible to the advertising-sown want/need confusion, and what a kid actually needs in a computer might be very different from what’s really wanted; that confusion can amount to hundreds of dollars. Help the kid work out what’s truly best and then explain the cost differential between using money that’s been saved and money that’s borrowed. Then put that difference in terms of opportunity cost of the next alternative, such as dinner and a movie with friends. Perhaps the device has to be purchased now, in which case financing might have to be an option. But if the kid can wait, then it might make more sense to wait and save the money instead. The unasked question is whether the father could wait for such a purchase.
Truly learning something and taking it to heart occurs over time, with lessons and comments delivered persistently and consistently. Once you’ve gone over something several times – and going over it doesn’t mean that it has to be an hour long talk – then develop simple taglines that you can use when the situation comes up again. If I’m paying a repair bill with cash or check, I’ll comment …and this is why we save. If the kid is yakking on about buying something, I’ll simply glance and say yep…want, need. When we were saving for a trip to Europe, a process that lasted about two years, any of the kids would come up with the suggestion to buy something or do something that required money and my response would be a curt Europe. There reached a point at which one of the kids started speaking and then cut herself off, saying oh yeah, Europe. The tagline with which I was raised was my mother’s we gotta pay the mortgage. It didn’t go into the specifics of which mortgage product is best or how to calculate what we could afford, but it constantly reinforced the lesson of putting the need ahead of the want.
The article is correct in the view that many parents do a poor job of teaching about money because we ourselves are poor with money. Since the end of the Second World War – three full generations – the push has been for consumer spending to drive the economy. This consumption approach is spurred by sophisticated and persistent advertising, and many of today’s parents and grandparents have been fully caught up in it, rendering us both poor examples and teachers for the kids. The impact has been such that many baby-boomers are unable to retire because they simply haven’t saved and the knock-on effect is that the young adults are now having to compete with the boomers for jobs. (Hmmm, there’s a question, what do we owe our elders?) If we want our own kids to avoid that same trap, then we’re obligated to do a better job of financial management so that they can learn from us.
Apart from the issue of financing a purchase instead of saving for it, there are two other aspects that highlight how truly out of touch today’s financial management principles are with reality. The first was a teen’s comment that his family did discuss the stock market at the dinner table and how it was doing; my own conversations with the kids are about how the stock market is the last place that a simple individual investor like me should be. The market is presently a rigged casino. High Frequency Trading with programmable algorithms make crooked practices like front-running and quote-stuffing make classic investing impossible; likewise the presence of overwhelming liquidity courtesy of the Federal Reserve via the major financial institutions proprietary trading desks utterly divorces the market from the reality of economic life around us. When I know families in middle-class Brady Bunch neighborhoods raising chickens for food, the market is simply not realistic. The second is one contributors comments about the value of learning the principle and value of compound interest saving. In a world in which the savings account rate for kids is .1% and a good CD might be in the area of 1.5%, there’s no effective value at all in compounding. The words promote savings but the actions promote spending at the punishment of savers.
Children can learn with lesson plans, but what sticks best are the small repeated doses of a consistent set of messages, the so-called teachable moments. Determine what you want to teach and use pay attention to what’s going on around you and those moments will present themselves. If there’s a moment that you can have a short conversation, grab it. If not, make it a point to revisit it when the opportunity to talk does present itself. These repeated lessons over the course of time will do far more to teach the kids about money and personal finance than they’ll ever get in a classroom.