To Develop Savings Skills, Start ‘Em Young!

My proudest moments as a parent are when my 2-year-old son finds change lying around the house and runs excitedly to put it in his piggy bank. We never consciously did anything to encourage this behavior. I like to think it is due to some small part of my DNA shining through.

The recent CFI and HelpAge report, Aging and Financial Inclusion: An Opportunity, highlights that most people expect to use accumulated savings and assets to fund their retirement, but in reality end up relying primarily on support from family, friends, and the government.

I’ve blogged in the past about how much trouble people have with saving. And it seems financial intuitions for their part use every imaginable mechanism to make it easy (pension contributions at 7/11, behavioral nudges for opting employees into retirement plans), fun (prize-linked savings, lotteries, and games), or obligatory (compulsory savings as a loan requirement) for their clients to save.

I have always believed that the ability to save is a key piece of financial security, and that building the financial capability to save at a young age has a profound impact on financial security throughout a person’s life, even into the retirement years. Recent research undertaken by CFED to “deepen our understanding of youth financial capability and explore the behaviors, types of knowledge and personality characteristics that help children and youth achieve financial well-being in adulthood” supports that belief. The research included an extensive literature review of consumer science, developmental psychology, and related fields to explore the factors that comprise youth financial capability, as well as how and when these abilities are developed.

The CFED report highlights that at a young age kids begin to develop the financial skills needed to successfully navigate financial matters as adults. Specifically, the report identifies three critical processes for building financial capability in childhood:

  1. Developing the executive function in early childhood that allows kids to delay gratification while planning for the future. This function also plays a critical role in the development of personality traits such as perseverance, self-regulation, and future orientation, which are likely to contribute to an individual’s ability to achieve and maintain financial well-being in adulthood.
  2. Developing a “financial common sense” in middle childhood, which shapes the financial attitudes, habits, and rules of thumb that help youth navigate their day-to-day financial lives.
  3. Building financial skills and deliberate decision-making strategies in adolescence and young adulthood.

This new research finds that building youth financial capability and instilling savings behavior involves foundational learning and development that begins in early childhood. Also, that the skills, attitudes, and habits that make up youth financial capability are defined by developmental processes that build on one another, and change over time as kids encounter experiences and environments that require new or different behaviors.

As a parent trying to prepare my son for a financially capable and secure life, I wonder what the future of financial services looks like, given how quickly financial products change. As a teenager, I filled out a savings book as babysitting money racked up, as a young adult, I was amazed to find out how easily I could get “cash back” using a debit card, and, just yesterday, I made my first Venmo payment.

My son’s piggybank is cute, but I have no idea how to prepare him for whatever financial mechanism he will actually be using as an adult. By then, my future grandkids might roll their eyes at the totally outdated Venmo birthday payments I send them, which could be the future equivalent of checks from grandma. Regardless of the mechanism, I hope to instill now the executive function that will allow my son to delay gratification, self-regulate, and plan for his future and retirement.

Have you read?

Credit Suisse-Sponsored Event Focuses on Financial Capability and the Policy and Business Case for Youth Financial Inclusion

Riding Financial Inclusion Disruption: Are Youth Savers the Surfers or the Wave?

A Week of Global Action for Child and Youth Finance

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