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Tuesday, January 11, 2011

Financial Literacy Tip #1

Many times when people find out I'm a financial advisor they ask  for a financial literacy tip.  How can they help their children become more financially astute?

One I like goes as follows.  When children are young and the family is eating out, offer them a choice between ordering water or the usual soft-drink.  Tell them if they order water, then you will give them $1.  Explain to them they can spend the dollar right away or save it up and get something they really want that costs a bit more.  They catch on pretty fast to the idea that it pays to save, which in itself is a great lesson.  In fact, the whole lesson of deferred gratification is extremely important.

This exercise can morph further into a valuable lesson on the difference between wants and needs.  Incidentally, the family that puts $1 aside every time they eat out will not only save on dentist bills (sorry Dr. Goodman!) but have a bit of money after several years to apply towards college.

The Marshmallow Experiments 

In the early 1970s, Walter Mischel, of Stanford University, studied deferred gratification formally by performing what are referred to as the "marshmallow experiments."  He offered young children a marshmallow but told them that, if they could wait 15 minutes before eating their marshmallow, he would give them a second marshmallow.  Then he left the room and observed them via a two-way glass.  Some couldn't resist and gave in; others folded their hands, looked the other way, and waited patiently to get the second marshmallow.

In follow-up studies decades later, it was found that those who waited did much better in many areas, including school work, social adjustment, etc.  In general, they were found to be living much more satisfying lives all around.

What are your best financial literacy tips?

7 comments:

  1. A savings scheme a la 401k. Offer to match what they save within a fixed period from jobs/pocket money, whatever...

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  2. Good one. In fact, an upcoming tip will be to get them to contribute to a Roth IRA when they start earning money on a job.

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  3. D Waz said.......

    Well then you owe me some money Pops! As far as I can remember I ordered water nearly every time we ate out. Pay up old man......

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  4. re: D Waz You inherited Gram's frugal genes...you didn't need to be taught deferred gratification.

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  5. D Waz said.......

    I didn't know you inherited frugality genes! Did I get my stunning good looks and astounding intelligence from Gram too?

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  6. 15 minutes is a long time to wait when you're a little kid.

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  7. re: Kevin 6 months is a long time for the young employed to save up for an Xbox.

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