Teaching finance to children – tried and tested psychological experiments

1st August 2011

I've met with the Personal Finance Education Group (PFEG) a couple of times in the last year or so. They explained that it is very difficult to get personal finance included in the school day. There are time constraints – basic issues such as reading and writing require attention, as well as any number of other competing subjects – all supposed to be included in the school curriculum. The teacher is subject to the whim of political masters – but teaching the financial basics is important.

However, it would be far better if we could also teach children "why" they are handling money, rather than simply "how" to handle it.

So what can parents do themselves? They can teach children to defer gratification and help structure experience. 

After all, we all want to have what we want now – not in the future. 

The classic experiment is that children are offered a sweet and told that they can eat it now, but if they wait to eat the sweet they will get a bag of sweets in ten minutes or so when the experimenter comes back. In theory, around a particular age children learn to "defer gratification", to take less reward (or none) now, in order to gain a bigger reward later. This is, of course, in theory!

Can you do that?  If you see a pair of shoes, a gadget or whatever your favourite "impulse buy" is, can you just ignore it? How about in a sale? Do you think – "It's on sale, and I'll buy it some time so I may as well get it now"?

There is a reason why adults don't save for pensions – we want the sweet now instead of the bag in ten minutes. However, once we're grown up we buy a car instead of a single sweet now and have £25,000 a year less pension instead of a bag of sweets in 30 years' time. 

Research into this shows that children who were able to defer gratification were more successful later in life, got higher school grades, and had better incomes. Also, research suggests that being exposed to situations where deferment of gratification is useful and can be practiced, and particularly to seeing, practicing and learning strategies for doing it effectively are handy techniques for everyone to master. 

This means that structuring experience is useful. Allow children to understand that decisions and actions have consequences, and help them reflect and develop effective life skills.

For example, young children take money for lunch on a school trip and have responsibility for the money, and it doesn't mean much to them initially. But when they spend the money on sweets, go hungry all day and they get home you say, "well, I did say you needed to get lunch, why do you think I make you come in from playing to have tea each day?" and help them reflect on what it means, you make it easier for them to learn. Hopefully, when they go off to university, they're then a lot less likely to blow their whole student loan in the first month. They understand the consequences.

Involving children in household finance, rather than yelling at them not to run up the phone bill, teaches them life skills and consequences (if you help them think about it, and not just blame you for being a pain!). They may get bored with discussions about bills, etc, but when they realise (with your help in reflecting on experience) that economising on some stuff allows them the money to have better clothes, or a phone deal that is the envy of their friends. Alternatively, they learn that switching the lights off when they leave a room, not using more water than they need, and doing their share of the chores are actually really good things to do.

After all, being a stroppy adolescent costs them a lot of time, money and trouble – not with you but in the wider world.

More here: Teaching kids about money is vital

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