Despite money being the central tenet of every adult life, there is a tremendous lack of education in financial literacy in the United States. From childhood, there is an opportunity to systematically shift the way kids, teenagers and adults learn about how money works, and how it pertains to them. As parents and educators, it’s time we re-think when and how financial literacy enters the education curriculum. With a little modification, we can turn common childhood experiences into opportunities to play with and learn about the mechanics of finance.
In a recent project, we set out to better understand financial literacy and the relationship people have with money and what (or if) people thought about the financial institutions and systems managing that. Did they trust the financial system? Were there specific touchpoints that increased or decreased their trust? How much did they think about the mechanics behind the scenes? How did they learn about money, savings, insurance, etc.? Was it a family member or friend, a class, a local bank, or just trial and error? What stood out to me about this particular research were the many common themes and experiences we uncovered across all of the participants, regardless of social or economic situations.
Daniel, a US Army officer in his mid-20s, grew up in a household that didn’t use traditional banking services. He told us: “I didn’t know the difference between a savings account and a checking account until my Senior officer brought me to the bank, had me open an account, and then told me to put my money in there. Where I grew up, you just put the cash under the mattress.”
We saw a similar pattern of behavior in individuals who grew up in affluent households – someone they trusted told them they needed to have a bank account and helped them sign up. Simply put, many people open a checking, savings, and/or investment account because “that is what you are supposed to do.”
With a limited understanding of the full system—the reason to use different types of accounts or the interplay between each financial vehicle over the course of our life—it’s easy to make a mistake. And that can be costly. Without proper education, a 5K or 25K credit limit can feel like free money—and credit card companies aren’t going to dissuade you from spending it all. Most people I know have over-drafted their checking account or maxed out their first credit card and ended up paying off high fees long after their youthful purchases were used up.
No one in our research, or subsequent conversations within our team, took a course on basic finances—and that in itself is problematic. Instead, the pattern usually follows a common trajectory—someone we trust tells us what we are “supposed” to do, we take the prescribed action, and immediately run into an issue. My own experience was no different.
When I was little, my mom opened a savings account for me at the local bank and explained the importance of saving my money. For 16 years I heard the same mantra from every authority figure in my family, “save, save, SAVE!” When I was finally able to access the account on my own, I spent almost everything I had. Fast forward a few years and I repeatedly over-drafted my checking account because I didn’t anticipate the timing of charges. I thought I was “doing it right” because I had the right type of accounts, but I hadn’t learned to use them based on my own needs, funds, and values.
For me, the experience of learning personal finance closely parallels the way I learned how to ride a bicycle. One day, my parents decided it was time to learn how to ride. They purchased a bicycle that was a bit too large, strapped on my helmet, and put me on the seat. They gave me a brief overview of how to steer and pedal – and then ran behind me shouting “pedal, pedal, PEDAL!” I ultimately took a hard right into the bushes about 15 feet past the launch point. I had all of the equipment required to ride a bike, but I lacked a fundamental understanding of how to put the pieces together.
It wasn’t until I had kids of my own that I realized I could teach them about finance in a similar way to learning to ride a bike, but I’m taking a different approach than my parents. Both of my boys learned how to ride a bicycle, unassisted, before the age of three. Tears were still shed in the process, but they success more quickly because we compartmentalized the skills required, introducing them one at a time.
- When they were able to walk, we gave them a sit-on toy that moves forward and backward. This established the connection between pushing and movement.
- Then, we upgraded to a cart that allowed for basic steering—introducing the concept of turning left and right but at very slow speeds and without the need for balance.
- Next, we gave them a tricycle they could push with their feet. This new toy was much faster than the cart, so they learned to look ahead and anticipate their movements (many parked cars were still hit).
- When they understood the basics of movement and steering, we introduced them to balance with a balance bike—a small bicycle without pedals. Now they used their feet to move forward as well as keep themselves upright.
- Once they had the ability to balance, we finally gave them a bicycle with pedals. By this point, training wheels were not required. Each child was able to take off almost instantaneously because they already understood the mechanics and practiced each of the skills necessary for riding.
My wife and I are taking the same approach to teaching our kids financial literacy—creating experiences that isolate the basic mechanics and movement of money and build on each sequentially.
- There is a token -> You can exchange the token for things
- You can acquire tokens by doing work
- You can acquire tokens by selling things
- You can store these tokens
- There are advantages to where / how you store these tokens
Milestone 1: Tokens and Exchange
The first step in their journey was to discover the ‘token’ of money. We used physical coins because it is clear to a 5-year-old that the size, material, and finish of each token has meaning—even if they don’t know what that meaning is.
Next, we introduced them to the concept of exchange: two dimes and a nickel = a quarter, and 4 quarter-shaped coins are worth a piece of paper that has a dollar on it. This understanding moved past the idea that ‘more tokens of any size or shape = more wealth.’
Next, we brought our son to a toy store and let him purchase an item using the coins he found around the house. At this point, the concept of price was still pretty confusing, but he latched onto the idea of being able to acquire money that he could spend at the toy store—blissfully unaware that I was subsidizing his $6 ornate lollipop purchase.
This entire sequence of events took about a week. After coming home from the toy store, the idea of exchanging money for goods had firmly set in. He was now curious about generating more money to fuel his purchases.
Milestone 2: Earning and Storing
The next big step in our journey was to understand some of the basic ways to acquire more money. For most parents, this part is obvious—do some chores, sell lemonade on the street corner, etc. But this is where I think many of us miss out on two other concepts that are critical to understanding the movement of money:
- There is value in the objects around you. We let our kids pick a toy and bring it to a consignment shop, where they are able to get ‘the value’ out of the object.
- You can put the money itself to work for you.
To illustrate this concept, we introduced Noah to 4 different “banks” as a way to store his money. The first was a wooden piggy bank that he keeps in his room. He liked this because he was able to admire his collection of tokens through the window on the top.
The second was a traditional brick and mortar bank that we’ve put his birthday checks into. We visited the bank and let him ask the teller for a statement that shows how much is in the account‑—and we treat the receipt from the teller as a physical token of value just like a dollar bill. He then put this receipt in the piggy bank.
The next two banks operated a little differently. Using two cigar boxes, we created ‘holding accounts’ (effectively a CD). For the first holding account, if he is willing to part ways with being able to physically see his money for 5 days, each $5 deposit will return a quarter. For the second holding account, if he is willing to part ways with his money for 15 days, each $5 deposit will earn $1 in return.
We then took all of his money (including the teller receipt from the brick and mortar), spread it out on his rug, and ask him where he would like to keep it. For a 5-year-old, the value of physically seeing the money is appealing because it’s tangible. He was torn between keeping the money in his piggy bank and in the cigar box that generated a return, where he wouldn’t be allowed to look at it until the term expired. He settled on keeping a few novelty tokens on hand (silver dollars and 50 cent pieces) but put the remaining $25 into the cigar box CD that would stay closed for 15 days.
The first few days of the term were a struggle. He wanted to peek in to see how his money was doing once or twice a day. So, we created a tracking board that let him count down to the completion of the term, and updated the board each morning. This quenched the need for continuously checking on his money. At the end of the term, Noah received his first ‘investment’ payout, and when given the choice to ‘re-invest’ the new sum of money, he did—after holding on to the new sum for a few hours, basking in its glory.
Milestone 3: Maximizing Return & Market Pricing
The current topic of discussion in our home centers around chores. Having deployed all of his capital into ‘high yield savings accounts’ (see above), our 5-year-old has now turned his focus onto the chores he can do to earn money. Our approach to chores involves dynamic pricing. Specifically, we’ll openly discuss the value of completing an action that is primarily based on how little of a desire my wife and I have to do the thing ourselves. For example, when I’m already cleaning the bathroom and Noah asks to help for a payout, we explain that the work has already started and there isn’t anything for him to do. But if he realizes the bathroom is dirty and offers to clean it himself, he can earn $1 by doing so.
He has taken off with this idea. He notices when the kitchen floor is covered with food from his little brother’s meal and offers to mop it for $2-3. My wife and I, not wanting to mop the kitchen after being at work all day, are happy to oblige. He’s realized, that depending on the chore—and the degree to which my wife and I are willing to do it ourselves, there are ample opportunities to earn money all around him.
Finding Other Opportunities
Both of my kids still have a long way to go until they are managing their finances—but I firmly believe that just like riding a bicycle, they can learn the mechanics and movement of money if they are given a set of experiences that compartmentalize the complexities.
My oldest, Noah, is getting ready to go to school, where he’ll have new opportunities for discovering and manipulating the mechanics of money. Thinking back to the various gift wrap sales, popcorn sales (via the boy scouts) or other fund raisers put on by schools, there is a lot of untapped potential for learning about the mechanics of money. For example, why aren’t we letting our kids choose the supply source? Surely, with Amazon being a click away, they can find wrapping paper to sell at a fraction of what the supplier charges the school to put on the fund raiser? Another opportunity comes at the point of sale. Why are kids, like girl and boy scouts, using fixed prices when selling commodity goods? One would expect that something as rare and tempting as a girl scout cookie would be an opportunity for a troop or classroom to experiment with pricing while standing out in front of the grocery store soliciting strangers for cash.
Unfortunately, the basic mechanics of these experiences have not changed since my wife and I participated in them. I recently asked a scout troop mom why she doesn’t let her girls experiment with the pricing of the cookies? Surely, the only potential impact is that the girls earn a few extra dollars for their troop or school—but the response I received illustrates just how entrenched our limited learning experiences are. The troop mother in question responded, “We prefer to be ethical in our sales.” Quite the claim from someone relying on free labor to underpin the bottom line of their school / troop.
The key for me as a designer, parent, and educator is to find ways to create experiences for my kids to learn about the mechanics of money. In each experience, I focus on finding ways to remove abstract vocabulary from the equation, while letting them play with one or two mechanics at a time—progressively adding more complexity as they demonstrate the ability to balance and pedal at the same time.
For the rest of us, I think it is time to question where and how our kids learn about money, as it is clear to me that we can’t rely on the education system to provide the experiences I’m looking for. When and if my kids participate in these types of fundraisers, I’ll have them make comparisons between the cost of the goods from various suppliers. IF they can find a cheaper product, I’ll give them the option to keep the difference, or choose to add that to the school’s total take. When they start selling cookies or wrapping paper, I’m going to let them experiment with pricing—and again, they can choose to keep the difference, or add it to the total. Not only is this an opportunity to learn about the mechanics of money, it helps them understand that their time inherently has value, and that they can scale this value beyond what the ‘system’ has told them is possible or appropriate.