Is Your Kid Going to Be a Financial Disaster?

Some kids excel in the arts, and others display athleticism from an early age, but there are plenty of talents that don’t come naturally to youngsters. While someone may have tendencies that make it easier for them to manage money, personal finance is a skill we all have to learn.

“It’s not something that people get intuitively — we didn’t evolve to interact with banks and stock markets,” said Joe Kable, a psychology professor who researches decision making and behavioral neuroscience at the University of Pennsylvania. “It’s not like we come with the right set of intuitions that make beneficial decisions in the financial realm.”

Still, some people understand personal finance better than others. It’s something we’ve all noticed through everyday interactions, like how one friend can’t seem to pass up a shopping spree, despite having a load of credit card debt, or how another seems hardwired to save as much as possible. Such behaviors may exhibit themselves early on, but your child’s desire for instant gratification doesn’t mean he will be in a financial mess once he’s an adult.

What Studies Say

There are some correlations between childhood habits and future financial behaviors, Kable said, but there’s not a diagnostic test you can conduct to determine your 4-year-old’s likelihood of falling into credit card debt in 30 years.

But there are simple things you can do to assess your child’s instincts, and perhaps redirect them if necessary. For example, the marshmallow test: You offer a kid something desirable, like a marshmallow, and something she’d want more, like three marshmallows. This is the test: You tell the child you have to leave the room for a bit, but she can call you back whenever she wants the one marshmallow. However, if she can wait until you come back, she can have three marshmallows.

“You measure how long the kids wait,” Kable said. “What you see is that variability is associated with other outcomes later in life, the ability to resist and delay gratification.” The frustration the kids experience relates to the feelings we encounter when managing finances as adults — spend now on something you really want, or save for something more important later?

Before you put your kid in a marshmallow dilemma, keep in mind that a child’s choice for one marshmallow now, rather than wait for the greater reward, doesn’t mean they’ll fail to save money as they grow up. Instead, use such behavior to inform the way you teach them about financial responsibility as they grow older.

What to Look For

Other than turning a child’s playroom into a psychology lab, there are other things to pay attention to as your child learns life skills.

Sam Renick, the creator of the “It’s a Habit” company, has focused on teaching kids financial responsibility for the past 12 years, and he emphasizes the importance of language when measuring a child’s understanding of financial concepts.

“Start being alert, taking note of how your kids are talking about money,” Renick said. “Is it ‘buy buy buy, spend spend spend, gimme gimme gimme’? Monitor what they’re asking for all the time.”

Pay attention to what you’re saying, too. If you only talk about what money can give you now, rather than talking about it as a long-term tool, your kids will pick up on that concept, Renick said.

What to Do

Instilling the value of earning money, having kids participate in their financial future through something like keeping a piggy bank, offering incentives for them to save — these are all ways you can influence your child’s future financial tendencies, no matter what they seem predisposed to.

Everyone has a different approach to raising their children, so the most important thing to focus on is starting early. Kable studies the decision-making qualities of children around 4 years old, and Renick mostly works with 4- to 10-year-olds.

“I think it’s a very difficult job for parents, especially in the environment we have created, with debit cards, credit cards, ATMs everywhere,” Renick said. “The great news is there’s never been more financial materials and resources available.”

Let’s not forget that being an adult doesn’t translate into personal finance expertise. How you, or your kids, understand foreign concepts like retirement planning and interest rates is tied to our social knowledge and what you learn from others, Kable said. With that in mind, do what you can to educate yourself and your family members.

“Can we predict who is going to make what financial decisions? There’s certainly tendencies that make it easier or harder for some people, depending on their personalities,” Kable said. “You can educate people, and that will shift them a little bit.”

Education may not be universally successful, but there’s no reason to give up on a kid just because she struggles to work for a delayed reward.

“Every day we have new opportunities,” Renick said. “You can take corrective actions.”