Teaching Your Kids About Personal Finances

April is “National Financial Literacy Month” in the United States.  In 2003, the U.S. Senate passed a resolution declaring April Financial Literacy for Youth Month, and in 2004 the Senate — apparently concluding that a wider audience should be getting that message — broadened the concept to National Financial Literacy Month.  The underlying concept is to use April to teach Americans how to establish and maintain healthy financial habits.

1057a15b2bc0402Like so many well-intentioned Senate resolutions, Financial Literacy Month hasn’t exactly worked out as planned.  April is a good choice — the month where Americans settle up and pay their federal, state, and local taxes is bound to make people focus on their finances — but the statistics and surveys show that Americans, on average, don’t manage their finances very prudently.  They don’t save for retirement, they have too much debt and use too much of their disposable income paying interest on that debt, they don’t live on a budget, and they haven’t put anything away into a “rainy day fund” to allow them to deal with an unexpected crisis.

When it comes to financial literacy, most Americans are still in the pre-school stage.

Recently I ran across an interesting article on how to teach your kids about financial literacy.  The article identifies five “life lessons” that can help to put children on the road to financial self-reliance.  The very first lesson is giving your kids an allowance, earned in part by doing chores around the house, rather than being given money or a credit card whenever they ask.  That basic concept reinforces two important adulthood realities — money has to be earned, and it’s a finite resource that doesn’t appear by magic and needs to be spent with care.  Other lessons include having your child save for a big purchase, getting a first job, going to college, and moving out — all of which have their own, important personal financial elements that will help to give your offspring a solid base on which to address their own lives as independent adults.

These are good lessons, to be sure, but I think that perhaps the most important lesson is what a child learns by observing her parents and other adult family members.  Do they behave responsibly?  Do they have jobs?  At the end of the month, are they fighting about money or fretting about how they are going to pay the bills?  Do they talk about finances at home, and discuss whether to buy a new car or use the money for some other purpose?  Have they established a college savings account or taken other long-term savings steps?  All of these are ways of conveying a crucial message:  people do have some measure of control over their personal finances, they can make choices, and financial matters aren’t something to be discussed in secret but rather are part of the backbone of any family.

Some of us, myself included, were fortunate to have had good family role models that taught us, by how they lived their lives, about the importance of hard work, saving, and investing.  They didn’t need a Senate resolution to tell them that setting a good financial example would help their children and grandchildren to live responsibly and within their means.

A Year Without Spending

Some people celebrate “Buy Nothing Day” — which aptly falls on Black Friday — as a protest against the rampant consumerism in modern culture.  The idea is to avoid buying unnecessary items and, instead, to spend more time with family and friends, and, literally, “live freely.”

Rolls of Dollar BillsA British woman took the concept more than a few steps farther, and decided to go for a year without buying anything beyond the basics.  That meant that she paid her mortgage and utilities and not much else, bought food in bulk and cooked her own meals, and rode her bike to work rather than taking the subway.  No dining out or drinks at the pub, no trips to the movies, no new clothes, no travel or vacations, and no luxury items like fancy foods.  She also turned down friends and family who wanted to buy her gifts.

To her surprise, she made it through the year, with the winter months being the toughest.  She saved a lot of money — about $27,000, all told — and found that she had come to enjoy simple things, like a picnic in the park or a walk through a museum that didn’t charge admission.  She also feels that she became closer to her family and friends.  In short, she says she learned that money didn’t buy happiness.

The most instructive part of the woman’s story of consumerist self-deprivation is this admission:  “I’d set myself budgets and spending plans in the past and they’d always fallen by the wayside on my next night out.”  People spend themselves into oblivion because they don’t have the self-discipline to control their behavior, whether it’s sticking to a budget or simply exercising good judgment on spending and refraining from making impulse purchases.  And then, at some point, they look around at a place cluttered with stuff they don’t use and clothes they don’t wear, and wonder where all the money went.

I wouldn’t want to go for a year without traveling, or enjoying a drink out with friends, or savoring a good meal on a special occasion.  Those are some of the things that make like special.  But avoiding unnecessary spending, living a more minimalist, possession-free life, and feeling a certain sense of pride that you’ve got your finances under control affords its own satisfaction, too.

Living On The Card

The Wall Street Journal reports that, sometime this year, the collective credit card balances for Americans will hit $1 trillion.  That’s just shy of the all-time record — $1.02 trillion — that was reached in July 2008.

We all remember what happened after July 2008, don’t we?  Subprime mortgage defaults soared, the housing market crashed, Wall Street firms toppled, and the American economy stood on the brink on catastrophe.  Credit card debt wasn’t a primary cause of the Great Recession, but in those tough times many American families recognized that owing too much money wasn’t particularly prudent and they needed to change their ways.

antandgrasshopperOver the next few years, our collective credit card balances declined steadily, and then stayed flat for a while.  Lately, however, they’ve been moving up again, and the trend lines are unmistakable — people are using their credit cards more and are carrying larger balances on them.  Auto loan balances, too, are at record levels.  The WSJ reports that much of the growth in collective credit card balances has come because banks have been reaching out and marketing their cards to subprime borrowers.  (There’s that troubling subprime word again.)

Any financial advisor will tell you that racking up substantial, long-term credit card debt isn’t a good practice, and that people would do better to set budgets, establish personal savings to provide a cushion against unexpected costs, and live within their means rather than borrowing for nonessentials.  Americans aren’t very good at that, however, and they’ve got short memories.  When you combine the mounting credit card debt with the declining savings rate in America, and then you read stories about how almost two-thirds of American families couldn’t handle an unexpected $500 car bill or a $1,000 hospital bill, it makes you wonder whether we’re on the brink of another big economic problem.

Why are Americans like the grasshopper in the tale of the ant and the grasshopper?  One of my retired friends who enjoys light reading about behavioral economics says that discipline views it as a combination of a desire for immediate gratification and a kind of paralysis in the face of potential financial problems.  He notes that even when Americans take courses on basic personal financial concepts and thoughtful planning, the lessons just don’t sink in, and the old bad habits remain.

At some point, however, the piper needs to be paid.  People who live from hand to mouth, with maxed-out credit cards that require large monthly payments,  might avoid complete disaster and make it to retirement, but with it’s not going to be the retirement of their dreams.  Without any personal savings, and with only Social Security to fall back on, they’re looking at “golden years” that are distinctly grim.  There’s a reason the grasshopper in the tale usually ends up in a threadbare coat, begging for a handout.