Children learn more about finances from their parents than any other source, previous research has shown. The process through which parents impart this knowledge onto their children is known as "financial socialization."
Much of the existing literature on financial socialization focuses on two things: the example parents set for their children, and what moms and dads directly teach their kids about money. However, research often overlooks a third important piece: giving kids hands-on practice managing money, says a new paper authored by University of Arizona doctoral student Ashley LeBaron.
The paper "Practice Makes Perfect: Experiential Learning as a Method of Financial Socialization," published in the Journal of Family Issues, explores the importance of parents giving children real-world experience with money to help prepare them financially for adulthood. The study suggests that future research should consider this sort of experiential learning a third key method of financial socialization.
Parents can give their kids practice with money in a variety of ways. They might give them a regular allowance, pay them for tasks that go above and beyond their normal chores, reward good grades with cash, or encourage them to save for special purchases or charitable donations. The specifics don't really matter, nor does the amount of money, which may vary based on a family's financial situation, LeBaron said.
The important thing is that parents give children hands-on experience with money early, when the stakes are still low.
"If the first time kids use a credit card or have to work or have to save up for something or have a bank account is when they're on their own, that's not a good time to be practicing," said LeBaron, a doctoral student in the Norton School of Family and Consumer Sciences in the UA College of Agriculture and Life Sciences.
"It's important for parents to give kids age-appropriate financial experiences when they're monitoring them," LeBaron said. "Let them make mistakes so you can help them learn from them, and help them develop habits before they're on their own, when the consequences are a lot bigger and they're dealing with larger amounts of money."
LeBaron and her collaborators at Brigham Young University interviewed 115 study participants, including 90 college students ages 18-30, as well as some of those students' parents and grandparents. They asked the students what and how their parents taught them about money, and in the case of parents and grandparents, also asked what and how they taught their own children about money.
Most participants said they had been given some sort of experience with money in their youth, and they considered that experience to be extremely valuable in preparing them to manage money on their own. Those who didn't get those kinds of experiences wished that they had.
Based on the interviews, LeBaron and her collaborators identified three main themes around what participants learned from the financial experiences they were given as children: how to work hard, how to manage money and how to spend wisely. The researchers also identified three primary reasons why parents said they provided their children with hands-on experience with money: to help them learn financial skills, acquire financial values and become independent.
LeBaron, who is a millennial, said she was interested in studying financial socialization partly because of the persistent stereotype that millennials are bad with money. She began to wonder if perhaps younger generations were not given the same degree of hands-on experiences with money that their parents and grandparents had.
While LeBaron doesn't yet have data to support those generational differences, she suspects many parents today may hesitate to trust their kids with money – and that could be problematic down the line.
"I think it's hard for parents, sometimes, to let their kids make mistakes," LeBaron said. "It's tempting to just shield kids from everything related to money, but it's really important for parents to get money into kids' hands early on so they can practice working for it, managing it and learning how to spend it wisely."
Ideally, LeBaron said, parents will teach their kids about money through modeling, explanation and hands-on experience.
"The best approach is a combination, where parents are setting a good example, they're having open, ongoing conversations about money, and kids have the opportunity to practice," she said. "If parents are doing all three of those things, there's a really good chance their kids are going to learn important lessons about money."