When Dawn Morgan was a teenager, she really wanted to get braces. Her parents, though, didn’t have the money for it, so she had to save for them herself. “I waited until I got my first job at age 16,” Morgan says.
Later, in her 20s, Morgan took financial workshops to learn more about money management, including how to avoid debt and save. Now a freelance writer and filmmaker in her mid-30s, she’s in the midst of launching a Kickstarter campaign to fund a short film, “Emily’s Braces,” featuring a teenage girl who learns about money by saving for braces — just as she did 20 years ago.
As Morgan discovered firsthand, teenage money experiences, both good and bad, can influence spending habits in adulthood. Indeed, a paper by Annette Otto and Paul Webley published in June in the Journal of Consumer Affairs found that after age 15, saving money becomes more important to teenagers than borrowing money or negotiating over it with their parents. The authors suggest that teenagers might be especially motivated to learn how to be financially independent, so it’s a good time to broach the topic with them. The findings also underscore previous research that suggests saving at age 16 is closely linked to saving at age 34.
“It confirms the findings of other work that money habits are really formed early in life. That’s why it’s important to have financial literacy in school,” says Annamaria Lusardi, academic director of the Global Financial Literacy Excellence Center at the George Washington University School of Business. She adds that the paper shows parents help shape the future financial behavior of their children. “It starts at home, at the dinner table,” she says.
“How young people deal with their money seems to be related to their psychological well-being, at least when they are college-age,” Otto adds. Research suggests that saving behavior, she explains, is often learned through social relationships within families, which is why it’s important for parents to encourage their children to save as well as to model saving practices.
A survey of 1,000 parents and 881 kids released last month from T. Rowe Price found that having conversations with children about money is essential for raising “financially savvy” kids. Giving an allowance and letting them gain firsthand experience with money can also help, the survey of 1,000 parents and 881 kids ages 8 to 14 found. Parents who gave an allowance to their children were more likely to have kids who said they felt smart about money (40 percent versus 25 percent) and say they are “knowledgeable about managing personal finances” (32 percent versus 16 percent).
“Giving an allowance does provide a great opportunity to talk to your kids about money,” says Judith Ward, a senior financial planner at T. Rowe Price. She adds, though, that money experiences don’t have to come from an allowance. “They can get money from other sources — birthday money, from grandparents — any of those opportunities allows them to have conversations about money,” she says.
Here are more steps parents can take to get their teens off to a strong financial start:
1. Get help if you need it.
Lusardi points out that many parents don’t consider themselves good with money, and they might not feel that they’re equipped to teach financial lessons to their children. That’s why she is a strong advocate of teaching personal finance in schools. “It’s really important that the more formal learning happens in the school. We should not take the financial literacy of parents as given,” she says.
Morgan opted to educate herself through local financial workshops and work with a financial coach to get on the right path after she built up some debt, including medical debt. “My habits are a lot better now. There are little things I can do like taking the bus and not eating out,” she says. Her advice to teens facing similar issues is to tamp down spending. “It doesn’t matter how hard you work if you let your money fly out the window because you get a latte or jeans,” she says.
2. Tailor your financial chats to children’s interests and needs.
While giving children a chance to manage some amount of money on their own can help get them in the habit of saving, it’s really the conversations about money that impart important lessons. Ward points out that every child has different natural inclinations toward saving, and you might have to guide them accordingly. “Assess how you can set up those good savings habits,” she says.
As teenagers take on jobs and earn their own money, then you can talk more explicitly about budgeting and saving, Ward says. She adds that when you start giving kids an allowance, make it clear that they’re expected to save some portion of it, so they can start to get in the habit. Other parents choose to emphasize charity and choosing a way to donate, she says.
3. Consider the implicit messages you send, too.
Even if parents don’t try to teach their children financial lessons, kids absorb concepts simply by observing their parents’ behaviors and the way they talk about money. If you never talk about money, for example, then you’re implying that it’s not important, Lusardi says. If you discuss budgeting, investments and financial priorities in front of your children, then you’ll help pass on your knowledge.
Lusardi’s previous research has found a strong connection between parents’ level of financial literacy and sophistication and their kids’ familiarity with basic financial concepts. A college-educated man with parents who had stocks and retirement savings was significantly more likely (by 45 percentage points) to be familiar with the concept of diversifying investment risk compared to a woman with less than a high school education and parents who were not wealthy.
In other words, financial literacy often begins forming even well before the teenage years, which means parents, and schools, have a big role to play.
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Why Teen Savers Have More Financial Success Later in Life originally appeared on usnews.com
