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Elizabeth Odders-White

Building a Strong Foundation for Financial Well-Being

by Elizabeth Odders-White Thursday, January 22, 2015

Insights into the Role of Executive Function, Financial Socialization, and Experience-Based Learning in Childhood and Youth

During childhood and youth, we build the foundations for financial well-being, which includes having control over one’s finances, having a financial safety net, meeting financial goals, and having financial freedom. The ability to effectively manage resources, plan ahead, and make informed financial decisions are all associated with improved financial well-being.

Together with Anita Drever, Emily Hoagland, and Emory Nelms from the Corporation for Enterprise Development, as well as Charles W. Kalish of the Department of Educational Psychology here at UW-Madison and Nicole Else-Quest of the Department of Psychology at the University of Maryland, Baltimore County, I reviewed literature from consumer science, developmental psychology and allied fields to learn how children can best develop the skills, attitudes and personality traits that will enable them to manage their finances as adults.

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Our synthesis of the literature indicates that executive function development is critical for pre-elementary students, financial socialization is key for elementary and middle school children, and financial skill building is vital for adolescents and young adults.

Among pre-elementary students, executive function, which undergirds many of the drivers of financial well-being in adulthood—including future orientation, the ability to delay gratification, and the ability to set goals—develops rapidly. Its growth is strongly influenced by the external environment, especially parenting. Research suggests that executive function can be improved through frequent practice, but the long-term success of such improvements has not been rigorously studied. Given the importance of executive function in adult financial well-being, further research that explores the potential for interventions in this age group should be prioritized.

Among elementary and middle school students, parental and other adult guidance in learning basic financial skills and healthy financial attitudes and habits is key. As children’s understanding of money matures, they are able to learn about savings, frugality, and financial planning, often by observing the behaviors modeled by parents and other adults. Perhaps not surprisingly, research suggests that active parental engagement around financial issues, including communicating the importance of saving and providing opportunities for youth to practice making simple financial decisions, is highly beneficial.

Among adolescents and young adults, increases in financial independence provide many opportunities for financial learning. Experience-based, practical, education programs that teach financial research skills and heuristics for money management show promise, although more research is needed to firmly establish the value and longer-term impacts of these interventions.

The research we reviewed establishes the critical importance of parents in fostering financial well-being for youth of all ages—not simply elementary and middle school children. (Note that we use the term “parent” broadly, as the parental role can be played by other adults.) Even very young children absorb financial values by watching their parents and other adults and can benefit from discussions of wants versus needs and from practice delaying gratification. Likewise, parental modeling and monitoring remain influential into early adulthood, and parents can help teens and young adults by providing guidance and opportunities for supervised engagement with the financial system.

Our review also generates a variety of hypotheses regarding specific steps that could improve children and youth’s chances of achieving financial well-being in adulthood. The existing work suggests that parents should be encouraged not only to give their children access to resources to make spending and saving decisions, but also to talk with their children about those decisions. Likewise, parents could encourage their children to set savings goals and to develop other positive financial habits. At school, simple budgeting exercises, role-playing, or computer simulations all have the potential to improve outcomes, as do activities that improve critical thinking and research skills. In all cases, research suggests that the key is providing opportunities for practice that are developmentally appropriate and include time for reflection. 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. They can also acquire a crucial sense of self-efficacy, another driver of financial well-being in adulthood.

In summary, the literature suggests promising avenues for intervention within each major age category. In many cases, these represent truly novel approaches to financial education—focusing on executive function improvements, despite their limited apparent “financial content,” for young children; emphasizing dual-generation financial modeling and learning for elementary and middle school students and their parents; intentionally teaching heuristics and applied financial research skills in later adolescence and beyond. Experience-based learning is already being increasingly incorporated into financial education for young adults, but our review suggests that even greater emphasis in this area would be beneficial.