How to Teach Children Good Financial Habits: CFPB Releases Building Blocks

Laura Adams, known nationally as the “Money Girl,’’ is a personal finance expert, a best-selling author and the creator of a popular podcast that seeks to educate American consumers.  She can relate to financial issues. Once, Adams spent way beyond her income, accruing items she didn’t need and lots of credit card debt.

She realized the problem, got more education and found her passion as someone who knows how to manage money. Now she’s an authority on the right approach.

But a funny thing about that education…

“None of us are really taught this stuff in high school or college,’’ Adams said. “You could even go for an MBA like I did and not have one personal finance class in your program.

“Financial literacy just hasn’t been a priority in our country. Unless you seek it out, it’s going to be a void in most people’s lives. It is a problem. Young people need a financial road map.’’

A Personal Finance Education Road Map

In September, the Consumer Financial Protection Bureau released a report, “Building Blocks to Help Youth Achieve Financial Capability,’’ which outlines personal financial education opportunities and strategies for supporting its development from early childhood through adolescence.

“The first line of defense for consumers to protect themselves is the ability to make informed and responsible decisions, and financial education that starts in childhood is an essential first step,’’ CFPB Director Richard Cordray said in a statement. “Our Building Blocks report adds to our ongoing efforts to see that every young American can gain the knowledge, skills, and resources they need to build a healthy financial future.’’

The CFPB’s three youth building blocks for financial capability are executive functioning, financial habits and financial decision-making skills.

Executive Function

Executive functioning emerges in early childhood, from ages 3 –5. It’s a set of cognitive processes used to plan for the future, focus attention, remember information and juggle multiple tasks successfully. It encourages perseverance, self-regulation and prioritizing future gain over current desires. Financial literacy programs for kids can help develop these cognitive processes.  In adulthood, they translate into saving, setting financial goals and developing budgets.

Financial Habits and Norms

Financial habits and norms emerge in middle childhood from ages 6 –12. These are the values, standards, routine practices and rules of thumb utilized in our daily financial lives. They help develop unconscious, automatic decision-making strategies based on attitudes, values, emotions, social norms and contextual cues. In adulthood, it’s translated into having a system to pay bills on time.

Financial Knowledge and Decision-Making Skills

Financial knowledge and decision-making skills emerge in adolescence and young adulthood, from ages 13 – 21. It’s familiarity with financial facts and concepts, such as skillful money management, financial planning, goal setting and financial research. Financial literacy education for high school students can focus on these learning concepts. In adulthood, these concepts are translated into effective comparison shopping.

The practical applications?

In early childhood, parents and educators can help to nurture the executive function by teaching patience and the concept of delayed gratification. In one study, preschool children who viewed a video of the Cookie Monster character resisting his favorite treat could wait four minutes longer for a snack than children who didn’t see the video.

It might help to teach children how to sort money. If they like to play make-believe take it one step further, describing not only your job but the jobs of people in the neighborhood. Point out business owners and how they differ from employees of other companies.

Children learn habits and norms from their parents, other adults and peers. Parents and caregivers can help by talking about everyday financial decisions, giving children values and behaviors to apply to their socialization.

It’s never too early to get in the habit of saving money, even with funds that are gifts to the children. Putting something aside will teach a valuable lesson. Once children start looking around for things to buy, it’s useful to point out the difference between a bargain and a scam.

Of course, hands-on experience is the best teacher for financial capability. Parents can support independent decision-making with guidance and opportunities for reflection. They can utilize teachable moments to incorporate financial planning and goal setting.

Research skills are probably the most valuable thing to learn. Most major financial decisions — whether it’s paying for college, owning a home or planning for retirement — require researching information, considering trade-offs and acting on that information. Adults must teach young people how to find and evaluate information while recognizing when to seek additional information.

Money comes earlier to children these days and the choices, fueled through the Internet, are enticing. The cycle often leads to multiple student credit cards and easily-obtained student loans, which lead to considerable debt when leaving school. Sometimes, it even leads to bankruptcy. The fastest growing bankruptcy demographic is ages 18 – 24, according to the Federal Reserve.

Greater access to money and less accompanying financial information can be a dangerous combination.

According to a 2014 survey by the Organization for Economic Cooperation and Development, which interviewed 29,000 people (15-year-old residents of 18 different countries), the U.S. finished ninth in financial literacy, behind Poland and Latvia, and far behind the overall leader, China.

Nearly half — 42.6% — of the Shanghai sample respondent scored at the highest level, while the U.S. had 9.4%. On the lowest level, the U.S. had 17.8% of its respondents, while Shanghai had just 1.6%.

“There’s a financial literacy gap in our country, no question,’’ Adams said.

Despite talk of a financial education push following the Great Recession, substantive changes never occurred. Only 17 states require a personal finance course for high-school graduation.

“I think, for the most part, teachers are intimidated by the subject,’’ Adams said. “Maybe they don’t feel they’re doing a good job with their finances. So if it’s not showing up in the classroom, we need to do a better job at home.’’

The challenge there is not to model poor financial behavior. According to the 2015 National Financial Capability Study (NFCS) that covered topics such as interest rates, inflation, bond prices, mortgages and financial risk, consumers who correctly answered at least four out of five questions decreased from 42% to 37% over the past six years.

“Financial literacy is not a topic people learn by breathing the air,’’ said George Washington University professor Annamaria Lusardi. “We must put this in the schools. The stakes are too high.

“There are too many financial consequences if you fail to contribute to your retirement account, if you continually carry debt, if you don’t pay off your credit card. These concepts must go to the classroom at an early age, the same as if we are adding a foreign language or computer skills.’’

Free Personal Finance Resources for Teachers

For age-appropriate lesson plans and workbooks, visit Free Financial Literacy Resources for Teachers.