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3 Financial Socialization: Creating Spending, Budgeting, and Saving Habits

How will our children learn to navigate these treacherous new waters without an experienced guide? Just like traveling in a new city, they will figure it out, preferably with your help. There may be a few twists and wrong turns, but ultimately, with focus and presence of mind, our children will find their way to being financially well—if not, they will be forever lost. Consider our children's spending habits today.

Do you remember when Amazon only sold books? I sure do! On August 5, 1998, “Amazon.com Is Expanding Beyond Books” was a New York Times headline. The article reported that “Amazon.com has grown to be the most successful merchant on the Internet, with 3.1 million customers.” Today Amazon has more than 310 million active customers and sells more than 12 million products, not including books (Source: Number of Active Amazon Customer Accounts Worldwide, Statista, and How Many Products Does Amazon Carry?, Retail Touchpoints).

Amazon and a seemingly infinite number of online shopping sites have given us unprecedented access to goods and services—and ways to spend money. Subsequently, that access has helped us create a culture of instant gratification and excess. Increased consumption and a stable labor market have led to greater spending in the United States, which may be a good sign for our economy, but this type of access to goods has both changed the way we spend and created a culture of excess. The technology behind consumerism is evolving at such a fast rate that it is difficult to fathom what will be next. While these changes to consumerism did not come with an instruction manual, it is clear that instant access and excess are not conducive to helping us become financially well. It is a whole new world, but we must meet our children where they are and understand the daily challenges they face.

The Consumer Financial Health Study (Center for Financial Services Innovation, March 2015, https://s3.amazonaws.com/cfsi-innovation-files/wp-content/uploads/2017/01/24183123/Understanding-and-Improving-Consumer-Financial-Health-in-America.pdf) finds that not only are 57% of Americans “financially unhealthy,” but 26% say their finances cause them significant stress, 43% struggle to keep up with bills, and 36% are not confident they could come up with $2,000 in the next month if an emergency arose. So, we are now entirely responsible for our financial resources in retirement, but the majority of Americans are struggling to keep up with their daily finances, even before they can consider saving for retirement. This, too, is a new challenge.

As Americans we must become more conscious of our financial journey before, during, and after retirement. We must work toward living a life of financial mindfulness and wellbeing in order to better enjoy our present lives as well as our future retirements. The words of Arthur Ashe echo in my mind: “Success is a journey, not a destination. The doing is often more important than the outcome.”

Now comes the good news. Financial wellbeing can be learned and practiced, like any other life skill. Spending, managing cash flow and credit, and saving and investing practices all influence financial wellbeing—for better or for worse. So how do we create spending, saving, and investment practices that have a positive effect on our financial wellbeing?

Consider that 30 to 40% of retirement wealth inequality can be accounted for by “financial knowledge” (Source: “Optimal Financial Knowledge and Wealth Inequality,” Annamaria Lusardi, Pierre-Carl Michaud, and Olivia S. Mitchell, 2017, Journal of Political Economy, vol. 125(2), University of Chicago Press, pp. 431–477). That 30 to 40% can make the difference between living on a fixed budget versus enjoying the life of leisure, meaning, and purpose that each of us has always dreamed about.

So, what is the best way to acquire this financial knowledge? For our children, it's positive “financial socialization.” Financial socialization is the process by which young people acquire the standards, values, norms, skills, knowledge, and attitudes needed to become functioning consumers in the marketplace (Source: Journal of Financial Counseling and Planning, 2013). It is a learned process of acquiring knowledge about money and developing skills such as banking, budgeting, saving, spending, investing, and using credit cards.

Financial socialization is the way most people learn how to handle their financial affairs. Who do you think are their primary teachers? You got it: parents. Every hour of every day, parents are “teaching” their children about finances, among many other things, with their own behavior. If you make a habit of spending unconsciously or irresponsibly, you run the risk not only of creating your own negative financial situation, but also of passing your financially unhealthy behavior onto your children.

Two separate studies about parental influence on children (B. L. Jorgensen and J. Savla, 2010, “Financial Literacy of Young Adults: The Importance of Parental Socialization,” Family Relations, 59(4), 465–478, and Clinton Gudmunson and Sharon Danes, 2011, “Family Financial Socialization: Theory and Critical Review,” Journal of Family and Economic Issues, Springer, vol. 32(4), pp. 644–667, December) confirmed that parental influence through financial socialization has a “direct and significant” influence on the attitudes and financial behavior of children and young adults. The findings of these and many other studies, coupled with the poor state of financial affairs in the United States our children will inherit, has prompted US government and many US nonprofits to focus on helping improve our children's financial literacy. Despite the importance of these efforts, research consistently shows that, like most learned behaviors, family and the dynamics within families have the strongest influence on children's financial knowledge (Source: Shim et al., Financial Socialization of First-Year College Students: The Roles of Parents, Work, and Education, 2009, 2010, https://www.ncbi.nlm.nih.gov/pubmed/20938727). Therefore, it's so important to start healthy financial socialization at home, at a young age.

Consider the science of habits. Researcher Wendy Wood in her work (“Habits: A Repeat Performance,” August 2006) found that 40 to 45% of the decisions we make every day aren't actually decisions, they are habits. Think about the implication of this as adults. We are walking around every day and 40% of what we actually do is based on something we may have learned decades ago, something that may or may not be positive, simply a learned behavior, most likely from our parents or major influencers from our formative years. Almost half of what we are doing every day is habit. For us as adults it requires some rewiring in order to change these habits, so the first step is to understand how these habits are formed, being mindful that they exist, and learn how to create new ones.

Within neurology the habit loop helps to explain how habits are created and how they function. The image shown here is from Charles Duhigg's book, The Power of Habits (Random House, 2012). This is a framework for either creating or changing a habit. The framework consists of four parts: have a plan, create a routine, provide rewards, and isolate the cue. The plan is the reason for the habit, the routine is the action you take, the reward is the items that positively reinforce the habit, and the cue is the trigger that initiates our routine.

Much of what we do with our finances is mindless, so bringing mindfulness into our financial lives starts with being mindful of our good and bad habits and course correcting when necessary. The nice thing about our children is that they are, as they say in psychology, tabula rasa, or a blank slate. We as parents and influencers have the power, through financial socialization, to provide them with good habits to carry them through the rest of their lives. Let’s dissect financial socialization as an example in practice. The basic foundation of financial wellness is to have control over one's finances. In order to have control one must have a plan for the monies that are earned; here for the positive financial socialization we will have a planned purpose for the money that comes into our accounts each month. For negative or neutral financial socialization, we will not have a plan.

	Positive Financial Socialization	Negative Financial Socialization
Routine	When I receive a paycheck I save 25% of my earnings	When I receive a paycheck it goes into my checking account
Cue	Receiving the paycheck triggers my mindful savings and action	Money in my account
Reward	Small: Each month seeing increase in savings and feeling in controlBig: Retire early/buy the new house/fund education, etc.	Spend it all
Result	Clarity of purpose and realization of planned reward	Spending without thought and purpose; no savings to accomplish your goals, no clarity or control of financial resources

In the above example, savings 25% of earned income is a big deal and certainly requires willpower, particularly for adults who are trying to change habits. But for children, they won't know any different. You can teach willpower by deciding a reaction ahead of time. Teaching ahead of time will give your children the tools and action plan when presented with a circumstance. I earn money; I save money. When Charles Duhigg talks about the power of habits, the cues and rewards are critical components of forming positive habits. As adults, if you engage in mindfulness and pay attention to things that are happening, you can change any habit. Preparing our children with a catalog of good, strong foundational habits through positive financial socialization can arm them with strong habits, eliminating their need to even make decisions about finances because they will be hardwired with willpower and the routine to make good decisions about their finances.

Armed with some heady research we are now able to start putting the pieces together for your family's financial wellness journey. Not surprisingly, though, many families avoid the topic of money like the plague. Many parents simply think they don't have the tools to pass on savvy financial skills to their children. In truth, it is not that complicated, but like every other skill it takes time and attention. This is a commitment, but one that will pay dividends in more ways than one. Consider that when children are 18, in the eyes of the law, we have crowned them adults. They can execute a contract to take out a loan for a car, buy a house, and execute a student loan contract. Most 18-year-olds I know are ill-prepared for all of the above. As parents, we can no longer afford to be completely unconscious of our spending and savings patterns. Find teachable moments that interest your children, simplify the abstract of paying online or using a credit card with an explanation of how things work, and take every opportunity to give your children hands-on experience in saving, spending, sharing, and investing.

Money-Minded Motivation

 Financial socialization is a learned process of acquiring knowledge and developing skills. Use this book to acquire the knowledge to develop new skills for yourself and your family.

 Financial wellbeing can be learned and practiced like any other life skill.

 Conscious spending and saving will not only help you meet your financial goals, it will demonstrate the same skills for your children.

 Find teachable moments about your child's favorite store to talk about budgeting to buy their favorite things.

 Explain to your child how a credit card works and why you are using it.

 When possible, have your child pay or participate in a spending decision.

 Habits are the strongest foundation for healthy financial wellness.