What’s Your Kid’s Probability Of Success?

Recently, I arrived at the moment in my life that all parents dread: my oldest daughter, Maeve, brought home math homework that surpassed my abilities. Even though I feel like I have a leg up on most parents because I do math every day for my job, I knew I was in trouble once they started adding letters, symbols and formulas.
 
Last week, after searching through the textbook to try to figure out how we’re supposed to solve for who knows what, I was hit with that paralyzing question, “Dad, when am I ever going to need to know how to do this stuff?”
 
“You probably won’t,” is what I was thinking, but of course I had to give the “parental” answer, “Well, what if you want to build bridges, or be an engineer, or an accountant, or . . . a math teacher . . . or something.” It was a struggle, but I eventually got Maeve to continue trying to work toward the solution.
 
But, honestly, don’t we all remember asking that question? And don’t we all remember rolling our eyes as we received that canned answer from our parents? But as a financial advisor and one who seeks financial solutions, I see some added validity to that answer. Even though most people never need to understand such high-level math, most do need to learn basic math principles in order to understand personal financial concepts.
 
What is fascinating to me is that there are only four states that require high school students to complete a stand-alone course in personal finance in order to graduate from high school. Massachusetts is not one of them, and frankly, I think that our children suffer as a result. In fact, the National Bureau of Economic Research (NBER) found that financial literacy was severely lacking among young adults; only 27 percent of young adults know about inflation and risk diversification and can do simple interest rate calculations.
 
Now, take a minute to think of the financial concepts that young adults are forced to grapple with when they leave the nest: credit card debt, compounding interest, mortgage financing, student loan debt, saving for retirement . . . and the list goes on.
 
Beyond the math, our kids are not learning about these things in their high school classes, which means it’s on us, as parents. The same study from NBER found that parents are a critical channel through which young adults acquire financial knowledge. The study goes on to say that, “those whose mothers had high education or whose families had stocks or retirement savings were more financially literate, specifically on questions related to advanced financial knowledge, such as the workings of risk diversification.”
 
We, as parents, often don’t want to involve our kids in financial discussions. We don’t want them to worry about money, or think they do not care where their school shopping budget comes from, but involving them in the family’s financial discussions is one of the best ways to start their financial education.
 
Most of us simply explain money by telling our kids that it doesn’t grow on trees, but it’s important for us to go further. When you are balancing your checkbook at the end of the month, make them sit down and do it with you. When you get the loan contract on your new car, walk them through the pages and explain what each line means. Go through your wallet and explain the difference between a credit card and a debit card, and explain to them how credit cards can create big problems if they aren’t used responsibly.
 
Even more than financial knowledge, kids learn their financial habits from their parents, and so we need to be good role models while we have the chance to show them financial responsibility. I mentioned credit cards already, but understand that how you use them will be the first indication to your kids as to how they should use them. And oftentimes, the first opportunity they get to use a credit card is when they are no longer living in your house. There’s a reason college campuses are filled with people offering credit cards to students. They know that most 19- to 21-year-olds are not financially savvy, and they want to take advantage of that situation. Is it right? Probably not.
 
Hmmm . . . reminds me of a famous Confucius quote, “The superior man understands what is right; the inferior man understands what will sell.”
 
It is also extremely important for parents to explain to their kids the importance of saving for their future. Talk to them about how much you put away for retirement, how compound interest works, and why it’s important to start saving now. Many clients of ours have worked with Susan and me to set up a Roth IRA for their child, and we encourage them to bring their kids in, so they can be a part of the process and understand the advantages of making a commitment to saving.
 
It’s easy to assume that since our kids can understand sines and cosines, they will understand how an interest rate will affect their car payment, but the truth is, if we don’t teach them, they likely won’t.
 
In my profession, I like to talk in the world of probabilities . . . financial education will undoubtedly give our next generation the highest probability of financial success.
 
Folks, be vigilant and stay alert, because our kids deserve more.