Financial Illiteracy:  Time to Stop the Madness

Financial Illiteracy: Time to Stop the Madness

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Financial Illiteracy

This all started with the travel stories a father by the name of Newell Hendricks told about when he took his girls to Florida on Spring break.

“The girls made what amounted to a handwritten spreadsheet in their notebook, so we knew each day what we had budgeted for each category, and we kept track of how we were doing.  I kept asking questions like “How does our total money budgeted so far match up with our total spent?” and then asking them to look in my wallet to see if I had the right amount of money left.
 
 I’d ask them to figure out if it made sense to go five miles out of the way to buy gas if it were three cents a gallon cheaper.  I’d ask which days we were better at meeting the budget, the travel days or the camping days.  It not only took up most of the time we were riding in the car, it got them very conscious of how we spent our money.

We would stop for gas and instead of asking me if they could have ice cream, they would look at the budget to decide if we could get it.  We put ice cream under entertainment, like my coffee.  Then they got the idea of going to Disneyworld!  We looked up the price.  I said. “Sure, if we can stay within our budget.”

They realized ways that they could save money, like eating beans and rice at the campground, and peanut butter sandwiches for lunch.  They realized that buying drinks at a restaurant was a total rip off.  I made coffee at the campground instead of going out for it and, even though pumping up the stove always woke them up, they thought it a good decision.

In the end, they did it.  We went to Disneyworld.  I really don’t remember much of the day, but it was a big deal for them and they made sure they enjoyed it to the fullest.”

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One look at the $1.1 trillion in outstanding student loan debt, the $845 billion credit card debt and the 3.9 million foreclosures suffered in the U.S. tells us adults don’t know much about money.

Making matters worse, women today continue at a basic disadvantage in long-term financial preparedness, because their incomes are still less then men’s, they live longer and they take time off to raise families.  That makes their financial illiteracy intolerable.

It’s time to break the cycle:  to be able to lead financially healthy lives, girls need to be taught the basics of money—and beyond.

How Parents Can Help

Parents are the number one influence on their children’s financial behavior.  Kids are watching all the time, directly or indirectly absorbing how parents handle the family money.  Most important, good financial practices have nothing to do with the amount of money a family has; it is all about what the family does with the money it has.

Children should see their parents (especially their mothers) handling everyday finances like paying bills on time, calculating family taxes and discussing investment options.  Large purchases should be discussed openly, so the children can see how decisions are made.

Open Savings Accounts

By age 3 to 5, children can already learn that you may have to wait to buy something you want.  Use jars marked “Saving,” “Spending” and “Sharing” to keep the process very visible.  Count money whenever anything is added and measure how close or how far they are from whatever goal they’ve set.  Remember that the younger the child, the more limited her or his concept of time will be.

Once they’re old enough for off-site money, it’s time for interest-bearing accounts so they can start learning the concept of compound interest.  (Otherwise it’s a tough concept to explain.)  Online accounts are easiest to set up and balances can be checked regularly.  Consider a matching-funds program, matching their savings 2-to-1or 3-to-1 as an incentive to save for larger purchases.

Where children get the money for such accounts is a very individual decision, whether the parents believe in an allowance or in paying for chores.  In any case, there should be a savings component to any money accumulated.

Look for Money Groups 

To get past any “taboos” about money in the family, look for available money groups or start one yourself.  Have maybe a half-dozen similar-aged kids and their mothers (or fathers) meet once or twice a month.  Start with Money 101 targeted to their age.  Set up projects, such as:

  • discussing and defining a short-term goal for each child and planning how to save the money; or
  • holding group garage sales to sell toys they’ve outgrown so they can buy other things; or
  • having parents openly share their money stories about what they learned as kids, their money fears and mistakes they made.

Teach Them to Research

On big ticket items, whether it’s a product or something like a trip, involve kids over 9 or 10 in the online research.  Let them show you their information-gathering skills.  Set the initial parameters for the purchase together.  Show them how to budget for that item, how to make the best decision and then involve them in the actual purchasing experience.

Make Retirement Real

One of the greatest problems young people (especially children) have is being able to relate to something as far off as retirement.  As they get into their teens, one valuable exercise is to help them visualize that someday they too will be older and will need retirement funds.

An effective tool is to have childhood photos of yourself and of any relative they know (aunts, uncles, grandparents, great-grandparents).  Gather pictures of the same people as adults (especially anyone of retirement age) and set the young and old photos side-by-side.  By seeing that young people become the older people they know and love, that should break the resistance around “Oh, I don’t have to worry about that; I’ll never be that old.”

Another effective step is an online “aging” tool that uses a webcam, the person’s present age and gender, called Merrill Edge Face RetirementSeeing what they’ll look like at retirement age makes that prospect that much more real and saving at a younger age becomes more meaningful.

Talk About Retirement

To reinforce the concept that retirement savings are part of lifelong financial planning, talk openly around teenagers about the different ways money can be saved for retirement.  Make terms like “401(k)” and “Roth IRA” familiar, and reinforce how important it is to start saving about 10 percent of pre-tax income early in life so there is no pressure to catch up in later years.

Share what you’re doing to take care of yourself in retirement, and how any college expenses will be handled.  The goal is to get a dialog going around all aspects of money and to end the financial illiteracy that has led to so many poor decisions around money.

And in doing so, you’ll guarantee their financial futures.  (As Newell Hendricks was doing for his daughters.)

Let us know in the Comments section below if your parents took any of these steps with you.

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Bio: Sharon O’Day fixes financial lives. She is a tell-it-like-it-is money expert with a successful career in global finance, plus an MBA from the Wharton School. Today she specializes in getting entrepreneurial women over 50 back on their game so they can have more money, less stress and more joy. With her “Over Fifty and Financially Free” strategies, they take actions that lead to their ultimate goal: financial peace of mind.

  • Susan Schiller

    Sharon, I can just imagine the whole world completely changing for the better if each of us implemented the practical tips in this article. Parents and children learning and working together… spouses having candid, realistic conversations about money… savings accounts growing, reducing insecurity and vulnerability… Money is certainly at the core of our relationships, for good or for bad.

    On a personal level, I’ve seen my own financial picture getting stronger as I take the baby steps forward, following your advice. As I was reading, though, I could not help feeling sad that I didn’t do more for my kids… and also wishing that my parents had taught me more of what they knew. I’m thankful, though, for my mom giving me the job of balancing the family checkbook, from a young age… and for my dad, before he died, teaching me about interest on savings.

    There’s something awakening in me that really wants to create a much better financial picture, to leave a legacy for my children. Your tips, as always, have created a compass, pointing me in the right direction! Thanks so very much, Sharon 🙂

    • Whatever you didn’t do for your children, Sue, is part of a generational story that you can still change. You can still open a dialog with them about what you wish you had done, what you’ve learned, what you’d like for them. They may still be in a position to pass what you’ve learned down to THEIR children … it’s never too late!

  • robindavidman

    Wonderful advice for parents, Sharon! They all should read this!

    • Thanks, Robin! My motivation to write about “money and parents and children” comes from seeing the damage in adults that comes directly from what their parents did and didn’t do.

  • The best thing I ever did for my daughter was encouraging her to leave her comfort zone (i.e. board & lodging at Hotel Mamma) and live on very limited funds.
    Thanks again for a great post that I pinned on my Pinterest board “Inspirational”! Have a wonderful week, Sharon!

    • I feel kids are missing out today … being able to come back into their parents’ comfortable homes … and never sharing that first apartment with three others (where nothing matched), scrounging to make it through the month, “roughing it.” What a wonderful teaching experience that was …

  • Great article and I loved the opening story by Newell Hendricks. When my children were little we started savings accounts for their recycling money. When we would take the aluminum cans to the recyclers the kids were so excited to make the bank our next stop. Once their balances grew to over $200 we opened mutual funds for them and transferred the money. Birthday money and other money gifts were not spent rather they added to their investment balances. When they reached 16 their investments had grown enough that they could purchase their first car. We added to those early savings accounts to the tune of $2 per payday…not much, but the compounding effect works!

    • There had to be such a feeling of pride (for you AND for them) when that first car was bought … what a difference when kids have some skin in the game. And to learn about compounding that young? Pure gold! 😉

  • Being financially literate is one of those life skills that I try hard to teach my daughters. They have a regular amount of allowance each month (which they do have to earn!) and just like in your story I encourage them to plan ahead for trips. If they think they are going to have to pay for a drink themselves then it’s amazingly how quickly they can make up a bottle of juice to take with them. The biggest rip-off over here is the cost of bottled water. Our tap water is absolutely drinkable, but you would be amazed at the number of my teenage daughters friends that will only drink ‘designer’ water. Madness!

    • ‘Designer’ water. Can you imagine, Carolyn? I know it’s an entire (massive!) industry, but I see people struggling to close out the month who spend $4 a bottle, twice a day, on water. That could pay a monthly light bill! Glad to hear you’re “saving” your daughters from that … 😉

  • Luckily for our son – my husband is VERY good with money – so our son is somewhere between the two of us. I have a tendency to spend, my husband doesn’t spend at all.

    • That should make your son perfectly balanced, Knikkolette! That is, if we as kids ever paid attention 50/50 to our parents … 😉

  • Wingate Wyndham Sulphur

    Wow! Great information and insights on how to save money on the small things to be able to enjoy the big ones. On vacation we eat sandwiches for lunch, bring our own muffins and oatmeal for breakfast to afford a nice dinner each night without breaking our budget. Every little bit helps =)

    • You’re right, heather, every little bit does help. It’s all about deciding what’s most important to you and “living” that!

  • Bonnie Squires

    Great post really enjoyed it.
    Some of our children don’t understand
    money because they are special needs
    but our youngest I call him the penny pincher.

    He loves to save his change and now spend.
    The time he spends it is at Christmas he loves
    to buy ever one in the family gifts for Christmas.

    I wont for get 1 year he had saved over $20 in
    change and we went to the thrift store he got ever
    1 in the family plus a friend a cups and than a toy
    plus the wrapping paper all for $11. He was so happy
    and proud of what he did.

    Bonnie Squires

    • That’s a great story, Bonnie! That’s the kind of financial basis that, if you can keep encouraging that combination of “understanding savings as well as generosity,” will give him a huge advantage as he grows up.

  • Kung Phoo

    What a great idea he had with his kids..

    • I thought it was a great idea, too, Rob. That’s why I felt it shouldn’t be left as a comment, but should become the topic of an article (with the author’s permission, of course).

  • Alexandra McAllister

    WOW! Small things do add up! Thanks for sharing this wonderful article, Sharon. So much great info for parents! Blessings.

    • Small things do add up, Alexandra. It’s amazing to see how much money in people’s budgets go to things they don’t even think about … until they need to tighten up a bit!

  • Mike

    Love this!! We are teaching our son how to save and how to understand money and cash flow.

    • Congratulations, Mike, teaching him that is one of the greatest gifts you can give him … because no one can ever take it away!

  • Tina Ashburn

    You are very wise. We teach our children so many things, but we fail to teach them the value of money.

    • Thanks, Tina! I didn’t have children I could teach … but I DID have parents who didn’t teach me … so the wisdom comes from “hard knocks” and lots of research.

  • MeliLovesCards

    Of all the things I wish I had shared with my children, yet didn’t , was issues regarding finances. I just didn’t know any better because it’s not something my parents discussed. The good thing is that when I realized this, I introduced this information and resources to my children. I am sure when they are parents, they will incorporate this information while raising their children!

    • Consider the good deed you did for future generations by doing what you had to in order to break the generational patterns of financial _____ (illiteracy, ignorance, innocence … I’m not sure what to call it!) That’s huge!

      • MeliLovesCards

        Thank you Sharon! I do remember having opened an account for my children, depositing the money they received from others. I also opened an account for my nephews and put money on their birthday every year. They are now teenagers and it’s part of their education fund!

        • You see? You started the new paradigm …

          • MeliLovesCards

            Oh yes Sharon, I opened the accounts, especially for my nephews, because of what I learned. It’s creating those ripples that bring about change.

  • Kelly

    Great article! Its amazing how many people have no idea how to manage their finances. But in the end their parents didn’t understand it either. So they have no idea how to put a budget together. If they did it they would definitely open up their eyes to where they are spending so much money.

    • Kelly, this really is a generational matter, where it’s difficult (and pointless) to assign blame. The best thing we can do is educate as many women so they pass that knowledge to their daughters and granddaughters!

  • Luisa

    Man oh man so many people especially women need to read this article. I believe its a generational thing, our parents didn’t have the tools to teach us so how could we have them. Great article my friend. This needs a retweet!

    • Hope you shared it, Luisa. That’s the best tool I have to get the message out … that of my friends sharing! We both know how vast the need is …

  • Simona R. Stefanescu

    It’s a great idea to open savings jars for kids, when they are smaller. It teaches them responsibility.

  • JumpinGoat Coffee Roasters

    Great advice for teaching children about finances.

  • Terri Lind Davis

    This is a great article! My kids are grown now but isn’t it funny how they can be taught the same things but one is always better at it than the other?! My son is rather good at budgeting but I’m afraid my daughter is a little more like me when I was younger. One thing for sure, I am always encouraging them to start now saving for retirement, something I did not do as I should.

    • They may have been taught the same things, Terri, but they listened differently. That’s mainly because they will have had different individual experiences early on, so the seeds landed on different fertile soil. I’m so glad you’re breaking the generational chain, regardless. (And the good news is that, while it’s harder, it’s never too late for us to catch up.)

  • Ann Zuccardy

    A thorough approach! I always thought all of this was common sense. I raised my daughter like this. We also used to “play” store a lot. Gave her practice in doing basic addition and subtraction skills in her head. I also taught her how to count back change (the old fashioned way – without a computer). I suspect she’s the only 19-year old around who can count change without using a machine! 😉

    • Ann, it was only common sense if you were raised that way or if you had an experience or opportunity that taught you that. For so many, it’s like a foreign language. (I know, seems hard to understand, but it’s so.) And I’m so glad someone will be able to add and subtract if all the machines fail … 😉

  • Norma Doiron

    Great post – again. It’s such an important issue that is too often not talked about. I applaud you for spreading the message.