I'm walking towards my gate at the airport with my stepbrother David when he suddenly pumps the brakes. He eyes one of those electronics vending machines, realizing that he is without headphones. "Go on and I'll catch you up with you guys," he says.
A few minutes later, he walks up to us with a wide eyed glare. He's staring at the headphones in one hand and the credit card he used to buy it in the other, completely bewildered. "Is everything okay?" I ask, laughing at his apparent confusion. He's still slowly inspecting each of them, almost in disbelief of their mere existence.
"Yea, yea" he responds, "I just... I can't believe I stuck this credit card in the machine and I actually got something I wanted. Is this... is this what being an adult is like?"
David was in his early 20s.
Financial Illiteracy
There is a sad reality underpinning the ridiculousness of this revelation. It took David over two decades to start to appreciate the value of money and learn the first steps of managing his own. It's not just him; it took me just as long to start earning my own paycheck and to start playing around with money that was truly mine. The sad reality is not our shared immaturity. Rather, learning how to manage money is something that is fundamentally missing from our early development and education.
Regardless of what our level of wealth is, we don't teach our kids how to properly manage money. Catey Hill notes that 7 in 10 wealthy families lose their fortune by the second generation. By the time we include the third generation, this number jumps to 90%. The article breaks down survey responses to reveal the following three reasons:
60% due to lack of communication
25% due to lack of preparation
10% due to lack of shared vision
These all come across as three ways of saying the same exact thing. Kids lack education when it comes to managing wealth. Lack of communication means they did not learn basic concepts in the past. Lack of preparation means they didn't learn how to manage what they earn in the present. Lack of shared vision means they didn't learn how to grow their wealth to secure their financial future.
When I got my first paycheck, I had no idea what to do with it. Should I just throw it in a checking account? Why would anyone get a savings account? What's a credit card useful for? Stocks look incredibly confusing, I'm never getting involved in that. What does investing even mean? I'm somewhat embarrassed that it took until my early 20s to start asking some of these questions.
We need to start encouraging kids to familiarize themselves with these concepts earlier in their development. They need space to make safe mistakes when they're 10 instead of making disastrous ones in their 20s. How do we direct kids' curiosity towards financial education?
Allowances
Kids are interactive learners. They love to interact with their environment and observe the associated changes to adapt accordingly. This is most prevalent in the toys they play with, the video games they're glued to, and the playgrounds they run around in during recess.
Expecting kids to learn the importance of how to write a check or how to invest in the future without having their own money is ridiculous. Most of the lessons we learn about money is through tangible consequences. When we splurge on one purchase, we get hit with the consequence of not being able to buy something else we want later. When we decide to invest our money, we could reap the future benefits of our conservative strategies by affording more luxurious items. To know how to manage money, kids must be given money to manage so that they can experience these consequences under the safety nets of their parents' house instead of the thorny bear traps of the real world.
We need to make starting an allowance with our kids a more common practice. In his book The First National Bank of Dad, David Owen allocated an allowance for his kids and did not impose any restrictions on how it should be used. He did not push them to save and let them use the funds for how they saw fit. But it was the only money his kids were free to spend. "Doing so allowed them to discover their own values", John Lanza noted in summarizing the experiment.
Kids will one day enter a world where they cannot rely on a parental financial advisor to guide all of their decisions. Allowing them to discover these values on their own when they're young will let them internalize the techniques before they're older. It will be as second nature as the other skills they learn while growing up - reading, basic math, and social cues.
Whatever responsible habits I have today I attribute to my parents trusting me with cash growing up. Adding financial education to our early development would be a game changer for future generations. It will turn using a credit card in our 20s from being a paradigm shifting revelation to a practice as common as brushing our teeth.