How to teach your kids to think more critically about money

As the world of finance becomes more complex, most of us aren’t keeping up. In this series we’re exploring what it means to be financially literate.

Advice on money often boils down to simplistic messages about budgeting, understanding compound interest and avoiding debt. But research suggests financial decision-making depends as much on our values, expectations, emotions and family experiences as information taught at school.

In short, the way people interact with money is highly complex and so the way we teach our kids needs to catch up.

It’s time for a shift from teaching children rote-learned financial rules of thumb to instilling dispositions and a thinking process that underlies good financial decision-making.

Read more: Why is Australian 15-year-olds’ financial literacy declining?

Funnily enough, the debate over “smashed avocadoes” illustrates two concepts that can make all the difference to how we approach financial decisions. The first is a future orientation and the second is self-regulation.

Thinking about the future, or a “future orientation” is incredibly important when it comes to managing money. This is a tendency to consider future consequences and a willingness to delay gratification in favour of longer term goals.

Self-regulation is the process by which we control our thoughts, feelings and behaviours. Being aware of our financial motivations and having the ability to critically analyse our decisions is also important.

These are the kinds of thought processes necessary for good financial decision-making.

Money is a limited resource

Research shows that both parental behaviour (like discussing financial matters with children) and dispositions (such as future orientation) have an impact on their children’s financial behaviour into adulthood.

This means that simply discussing money can help children build financial independence by practising making decisions. For example, parents and children can discuss what they want to do with any money they receive, and maybe encouraging them to bank and save.

Giving children pocket money is another strategy for accomplishing this. Although not everyone has the means or the inclination to pay their children for helping out around the home. And you don’t have to.

Research also shows that financial hardship - living on a limited income and going without – can be just as useful in shaping financial understandings as the experience of growing up rich. In fact, there are things that children observe and experience – like problematic gambling and the financial fallout of marriage separation - that can influence them to think and feel more conservatively about money.

Read more: Students’ low financial literacy makes understanding fees, loans, debt difficult

As part of my ongoing research, I have spent time working with parents, teachers, and 10-12 year old students. I’ve found that the experience of financial hardship is not lost on children. During interviews some have described the importance of working to earn an income. Others have told me that their parents work multiple jobs to make ends meet and money is stressful.

Some children suggested selling a car to save money, or competently described sophisticated economic concepts (supply, demand and market equilibrium) in relation to buying and selling second-hand goods, particularly electronic games.

These examples show that children for whom money is a limited resource bring valuable insights to their financial literacy education at school. There are ways that parents and teachers can sensitively tap into these insights during lessons.

Promoting critical thinking and financial independence

We live in a world that sells immediacy and makes it easy to tap and go. Figuring out how to balance short term desires with longer term financial goals that may seem out of reach - like funding higher education and purchasing a home - requires focus.

Ultimately, children need practice applying their literacy and numeracy skills to make financial decisions independently. This can take place both at home and in the classroom.

For instance, instead of giving children values-laden advice about what makes a wise financial decision (such as avoiding debt), use questioning techniques to stimulate and guide their thinking.

These could include:

• Reasons: What are your reasons for making that decision?
• Evidence: Can you convince me that is the best decision?
• Argument: What would someone who disagreed with you say?
• Impact on others: Will your decision affect anybody else?
• Consequences: What might happen next?

These questions engage children to think about what drives them and what all their available choices might be.

Read more: Economics and the brain: how people really make decisions in turbulent times

As painful as it can be, it can also be productive to let go and allow children to experience the odd financial misadventure and mistake. Later, you might ask…

• Reflection: How did that work out? What might you do differently next time?

These questions have the potential to promote critical thinking, a future orientation and self-regulation - without seeming to be too judgemental or interfering.