Financial Literacy 101

Have you noticed that teenagers frequently take risks that you might not?  Have you ever wondered why they do that?  There is a good reason.  They are testing their limits and they are developing an inventory of experiences that will allow them to avoid serious, even life-threatening, risks in future.

Suppose you knew there is part of your brain responsible for a single task –   understanding what is going on just now and estimating what the probable future outcome will be.  The estimation will be more accurate if there is a large inventory of prior experiences.  The ability to change to better behaviours is also dependent on their being a good selection of possibilities.

Therefore, it will work out better if young people are given the opportunity to be wrong.

Some things are risky enough that an adult might better discourage them.  Skateboarding down the roof of a church maybe.  Snake Charming For Beginners is probably not a good book for 14-year-old boys.  But, there are things that teach sound lessons and can only be fully learned from experience.

Consider the primary law of economic life.  You can spend a given dollar just one time.

A child can learn this easily and they will remember forever.  They can only learn it if the consequences of spending money are clear.  If they spend $10.00 on a magazine, it will not also be available to see a movie.  If parents bail them out, they will come to think it is possible to spend more than once.  That lesson carries into adult life and has consequences.

Eventually that absent lesson means that spending money with a credit card or a line of credit is the same as spending cash.  Notice the difference.  If I spend cash or use a debit card, I am spending money I already possess and once I spend it, it no longer exists for my purposes.  When I use a credit card, I am spending money that I do not yet possess.  I assume I will have it some other day, but when that day comes, rather than paying for what I bought I may spend it on another impulse.  I try to spend the money twice.

That does not work well for long.

Parents must, not should, provide their children with enough money so they can learn to make the decisions that teach them the rule.  If they have enough, they make their own decisions and live with the consequences.  If parents are the money tree or bail them out when things go wrong, they learn the wrong lesson.  Better to learn it now when the price is low than to learn it later when it may affect their lives and the lives of others.

Experience is a tough teacher but the lessons are well remembered.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

2 Comments on “Financial Literacy 101

  1. Oh I like this one you can only spend R1 once and it is gone and you will need another R1 for the other transaction.I have been teaching my children the same principle my son is fast catching up he now saves his school allowance and lends it to us with interest if the need arise but mostly his Mom.For my daughter it is a difficult proposition all together she tries but she impulsively spend what ever she has saved in an instant now she knows Dad or Mom will bail her out.I will now be firm on her demands and emphasize that she can not impulsively spend and expect us to bail her out but she is only 8 years old she has enough time to learn.Thank you Don we really appreciate your commitment to us we are more resourceful as Advisors with your help, God help you with long life, we are preaching and disseminating the information we receive from you impacting a lot more

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