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Recent Research Illustrates How Children Build Financial Capability from Early Age

By Emory Nelms on 06/04/2015 @ 12:00 PM

Tags: Data and Research, News

As seen in the June 2015 edition of CFED's newsletter...

Most kids don’t shoulder much responsibility for their household’s finances—but they are still beginning to develop financial skills, attitudes and habits, and to develop the cognitive abilities they need to successfully navigate financial matters as adults. Taken together, these attitudes, habits, skills and cognitive abilities represent a developmental understanding of youth financial capability. CFED and the Center for Financial Security at the University of Wisconsin-Madison led a research project, in partnership with the Consumer Financial Protection Bureau, 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.

As part of this project, CFED led an extensive literature review to explore the factors that comprise youth financial capability, as well as how and when children and youth develop these abilities. This research was published in the Journal of Consumer Affairs earlier this year.

Specifically, we identified three critical processes for building financial capability in childhood:

  • Developing executive function in early childhood or pre-school years. Executive function refers to the cognitive processes that allow us to manage the flow of information in our day-to-day lives, focusing our attentions and delaying gratification while planning for the future. Executive function also plays a critical role in encouraging the development of personality traits and social-emotional skills, 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.
  • "Financial socialization” in middle childhood. Financial socialization is the process by which children and youth develop their “financial common sense”—the financial attitudes, habits and rules of thumb that help them navigate their day-to-day financial lives.
  • Building financial skills and deliberate decision-making strategies in adolescence and young adulthood. By young adulthood, people begin making deliberate decisions about financial management. For example, a high school student saving up to buy a car might make the deliberate decision to visit multiple car dealers to secure the lowest price.

Over the course of our research, we found that each of these processes involve foundational learning and development that begins in early childhood. In addition, the skills, attitudes and habits that make up youth financial capability are not simply gained and stored for later use. Instead, youth financial capability is defined by developmental processes that build on one another and change over time as children and youth acquire new experiences and encounter new environments that require new or different behaviors.

This developmental perspective is important to understanding youth financial capability, not only because it better illustrates how development early in life lays the foundation for additional development as children grow, but also because it helps to identify promising avenues for intervention at different ages. This perspective suggests a broader approach to financial education, including focusing on building executive function in young children, emphasizing dual-generation programs that work with elementary and middle school students and their parents, and teaching critical thinking and financial research skills in high school. We’re eager to see how practitioners and policymakers make use of these powerful new insights to expand the reach and impact of financial education programming, all with the goal of improving kids’ chances of achieving financial well-being in adulthood.

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