Do you ever take your child to the supermarket and let them hand the money to the cashier? Perhaps they’re applying their newfound counting skills to sorting out your spare change? Or maybe they’ve got their first piggy bank to stash away a few cents here and there? These things aren’t just cute ways to keep them entertained. Whether you know it or not, your children are already developing a relationship with money that will last a lifetime. 

Researchers at the University of Cambridge have discovered that children develop most basic finance concepts by age 7. In 2013, Drs Whitebread and Bingham released a report for the UK’s Money Advice Service which explained that the ‘cognitive and metacognitive processes’ that drive financial thinking emerge at a very young age.i In other words, they might not get compound interest, bank fees or mortgages before they finish primary school, but they will hopefully have developed the pathways in their brain to understand these concepts later in life. These include functions like inhibition (self-control), working memory, and flexibility in applying ‘rules’ of money management.

So what’s the best way to help shape your child’s financial abilities as early as possible? Every parent has their own unique style, and each family’s lifestyle shapes the type of ‘teachable moments’ that are available to them. But whatever specific examples you choose, it’s a good idea to cover a few fundamental forms of learning opportunities. These include:

Observation

From the time they’re born, children can imitate other people’s behaviour. And by the time they’re 18-24 months old, they watch and imitate with intention – understanding that the behaviour has a certain goal or purpose.

Going to the supermarket is a popular example. Grocery shopping might be second nature to you now, but there are dozens of different behaviours and processes that little ones watch. They begin to watch you hand over money in exchange for goods and ultimately are able to understand that different goods are priced differently. They watch you make decisions based on which product is cheaper, which product represents better value for money, or which product you are prepared to pay a little more for.

In this digital age, letting your children observe you dealing with physical (notes and coins) money is more important than ever. With the rise of electronic payments, children have fewer opportunities to observe and learn things like the fact that money is finite, and different denominations carry different values.

Instruction

Of course, observation isn’t always enough. Without a little explanation, children can’t understand why you do things a certain way, or the emotions attached to spending money. ‘Instruction’ means being prepared to answer their questions about why you do what you do with money. It also means being conscious of when they’re watching you closely and taking time to explain your thought process as you act. For example, using the supermarket example, you might explain why you chose a product that’s on sale or why you chose to forego a purchase (i.e. to save money).

Practice

We’re not suggesting that you give your little ones responsibility for the weekly grocery shop – do that and you might be eating Coco Pops for every meal – but creating the opportunity to practice what they’ve learned on a smaller scale is ideal. For many families, this takes the form of giving children a small allowance that they can either spend freely, or allocate to set categories (such as spending, saving and giving).

There are ways to teach youngsters about other concepts such as delayed gratification, making the most of finite resources, and saving. For example, you could take a cue from the famous Stanford marshmallow experiment, and create situations in which your child gets a reward for delaying or waiting for something.ii It’s also not a bad idea to ensure that children start to understand the concept of money being something that you work for; paying pocket money for simple chores around the house is a great way to illustrate the concept.

Remember, whichever form your teaching takes, it’s never too early to start. Be smart about what your kids observe and experience today, and they’ll reap the benefits as adults.

i Dr David Whitebread and Dr Sue Bingham, ‘Habit Formation and Learning in Young Children’ University of Cambridge / The Money Advice Service, 2013

ii http://www.newyorker.com/science/maria-konnikova/struggles-psychologist-studying-self-control