When parents begin teaching their children about money, they often focus on the mechanics. Counting coins and cash. Earning money through chores and part-time work. How to open accounts and what different accounts are for. The magic of compounding interest. Budgeting and saving for purchases.
But understanding how money works will only take your child so far. Kids also need to understand the correlation between the actions they take with money and resulting outcomes. They need to believe that they are in charge of their money, not the government, the markets, or turmoil on the other side of the world.
Here’s why self-efficacy should be a bigger part of your money conversations with your kids.
Understanding Self-Efficacy
How does your child react when they receive a poor grade on a test? Do they buckle down and study harder? Or do they complain about the test, their teacher, the amount of time they had, how cold the room was, or a distracting classmate?
What about when they commit a costly turnover late in a soccer match? Do they learn from that mistake and return to the pitch determined not to repeat it? Or do they blame officials, teammates, their cleats, or the grass?
The child who thinks they weren't in control of those moments has low self-efficacy. They believe that they are, ultimately, at the mercy of external factors. Ultimately, whatever they do or don't do is secondary. Life is something that happens to them.
While internalizing this belief can be damaging for a child in many ways, in finance it can be especially crippling. According to research, people who score low on self-efficacy assessments tend to have worse financial outcomes, including higher instances of bankruptcies and foreclosures.
Folks with low self-efficacy might also grow up with a natural distrust of financial institutions. They may think that investing is a "rigged game" that they can't win. This attitude may make it very difficult for them to build long-term wealth and prepare for retirement. They may also be susceptible to "alternative" wealth-building strategies and outright scams that only reinforce their negative beliefs and put them in even worse financial situations.
Teaching Self-Efficacy
Children often learn their most important money lessons at home. Here are four ways that you can teach them how to take control of their money.
Open Multiple Custodial Accounts: Many families have rules around putting a percentage of gifted money into a savings account. But making match contributions into a brokerage account can help your child see the difference between saving and investing and encourage them to be more proactive about preparing for the future.
Set Money Goals: Does your child receive most of their big-ticket gifts at holidays and birthdays? Instead, make that video game console or new bike a money goal. This will shift the child's focus from the end result to the process of saving -- especially if you celebrate smaller savings milestones along the way.
Allow Failure: If your child burns through their entire weekly allowance in a day, don’t bail them out when they come asking for money to see a movie with their friends. Non-fatal money errors will sting in the moment, but they’ll also teach the child that money is a finite resource and how they use it has consequences.
Model Resilience: If your roof needs an unexpected repair that stretches your monthly budget, don’t hide your frustration. But don’t turn a challenge into a catastrophe either. Show your child that even when something doesn’t go according to plan, you have the ability to adjust and move forward.
Helping your children feel empowered is one of the best investments you can make in their future. Use what you’ve learned from your own Life-Centered Planning journey to put your kids on path towards confidence and prosperity.
