Review identifies keys to financial well-being for children and young adults

What’s the best way to raise children who are financially savvy?

Elizabeth Odders-White, an associate professor with the University of Wisconsin–Madison’s Wisconsin School of Business, finds that parents can take a number of steps at each stage of their child’s development to teach and model financial well-being.

Odders-White conducted a broad review of existing literature from consumer science, developmental psychology and related fields to identify how children can best develop the skills and approaches they will need to become adults who can manage their own finances, provide a safety net for themselves and their families and enjoy a sense of financial well-being.

Parents and other adults play a critical role, she says.

“The focus of this project was to identify the key elements that will lay the groundwork for financial well-being at different stages in life,” Odders-White says. “Our review found that parental modeling and monitoring are influential for youth of all ages and that there are promising avenues for intervention within each major age category.”

For pre-elementary students, parents can work on helping youngsters stay focused despite distractions and practice delaying gratification.

For elementary and middle school students, adults can teach basic financial skills and healthy financial attitudes. This includes learning about savings, frugality, and financial planning by observing behaviors modeled by parents and other adults.

And for adolescents and young adults, financial learning can be built through increases in financial independence, supervised engagement with the financial system, and experience-based, practical education programs that teach financial research skills, Odders-White says. This can take the form of such direct interactions with financial products as a joint bank account, credit card or student loan, coupled with parental guidance. And it develops in young people the ability to seek out and process financial information to make decisions, such as which card has better terms, what loan options there are, or whether it is better to buy or lease.

“In all cases, research suggests that the key is providing opportunities for practice that are developmentally appropriate and include time for reflection,” Odders-White says. “Through repeated practice that is supported by parents or other adults, children can develop positive financial habits related to skillful money management, goal-setting and financial research.”

Odders-White conducted the review along with: Anita Drever, Emily Hoagland and Emory Nelms from the Corporation for Enterprise Development, a Washington, D.C.-based organization working to create economic opportunity to alleviate poverty; Charles W. Kalish of the Department of Educational Psychology at UW–Madison; and Nicole Else-Quest of the Department of Psychology at the University of Maryland, Baltimore County. This research is part of a larger project they are conducting under contract to the U.S. Consumer Financial Protection Bureau to understand what sets the stage for financial well-being in adulthood.

Their work will be published in the Journal of Consumer Affairs.