Financial education for families
Key topic
This lesson explains to parents the importance of financial literacy for families and prepares parents to educate their kids on the importance of it. It begins with a brief overview about financial literacy as a philosophy and the relevant concepts such as savings and investments. We also briefly address the financial topography of sports and pro athletes in particular. We then explain what financial psychology is, how it relates to the family and the choices that the family will need to make.
Additionally, the lesson raises awareness on how parents can prepare financially for their kids’ college education and how to help their kids acquire financial skills that will help them throughout their lives.
Learning objectives
- Understand the importance of financial literacy for both parents and children
- Plan ways to incorporate financial literacy in the lives of kids
- Understand the concept of financial psychology
- Develop proper habits for good financial behavior
- Discover the importance of financial preparation for a college degree
- Create proper financial psychology conditions at home
Let’s begin today’s lesson with the following activity:
Action steps – Exercise 1 (6 minutes):
Ask the parents: Assuming that you were never to take this course
- were you planning on providing basic financial education to your children, and
- do you feel like you could do that effectively and accurately on your own given your skills and knowledge?
The essence of financial literacy
Financial concepts
By definition, financial literacy is the education and understanding of how money is made, spent, and saved, as well as the skills and ability to use financial resources to make informed decisions. These decisions include how to generate, invest, spend, and save money. I am sure we can all understand the importance of such skills when it comes to handling the family money at home, whether that be towards balancing cheque books and personal accounts, or preparing monthly budgets for expenses and of course knowing how to spend only what you earn, so as to stir away from financial hardships in the long run.
When it comes to sports and of course athletes, the concepts do remain the same, but the situation becomes a little more complicated. Professional sports careers are said to be “short and sweet”. Athletes can turn pro as early as 18 to 20 years of age – in Europe it can be as young as 16-17 – and most probably enjoy peak earnings before they even hit the age of 30 to 35, which is approximately the time that fruitful sports careers come to an end; in fact, it is most likely that they earn 70% to 90% of their lifetime earnings before that age. It is during that time, during the “glory days” of big dreams and big money that athletes are faced with making some serious financial decisions with lifelong impact. Athletes should be prepared and be competent enough to safeguard their earnings, prepare and invest for their life after sports, as well as prepare for any unexpected and unfortunate turn of events.
Financial vulnerability of athletes
Often times, athletes’ salaries are not fully guaranteed and poor performance, injury, on and off field behavior can adversely affect their earning capacity. The end of the athletes’ playing days usually marks the end of substantial earnings. In addition, athletes earn their money at a very young age, away from their homes or countries as most of them are offered lucrative contracts away from home; being away from home and the shelter of their family, puts additional pressure on young athletes.
The high income and celebrity recognition that athletes enjoy at an early age, usually leads them to adopt a lifestyle of the rich and famous, living beyond their means and with no real savings. The effect of sudden wealth cannot be handled properly, especially by young men and women, who are inexperienced in handling finances. It’s also highly probable that the people around the athletes, such as friends, love partners, coaches and others, seek financial rewards and returns as recognition of their contribution to the athlete’s success, which is rather difficult for the athlete to handle.
It’s for this exact reason that athletes are considered to be amongst the most vulnerable professionals across all industries. Just take a look at some facts and figures released by the professional leagues; 60% of NBA players go broke within five years of departing the league, 78% of former NFL players experience financial distress within two years after retirement and the MLB players’ bankruptcy rate is four times greater than the average US citizen.
Student-athletes, and of course professional athletes, often do not have the same level of financial literacy as people who took more conventional career and education paths. The unique financial challenges that come from life as athletes, combined with the lack of financial education, may lead to poor financial decisions which, unfortunately, have an adverse lifelong impact. This might include putting trust in the wrong people and choosing bad Investments. Advisor improprieties and misappropriations of funds can contribute to the financial problems of athletes.
So, how can we take preventive action against the financial failure of athletes? Many of the factors that make athletes financially vulnerable cannot be altered. The solution lies in educating athletes so that they acquire knowledge about money, personal finances and financial options, thus giving them the tools to make wise decisions concerning money. Children who receive a sound basis from their parents stand a good chance of growing up being better informed and more careful with their budgets than their peers. Parents should not underestimate the effect that their own money habits will have on their children as most young children grasp all the main aspects of how money works and their financial habits are formed usually by the age of seven (as per a study conducted by the University of Cambridge).
The importance of financial literacy for the whole family
Usually, it is with great joy and enthusiasm that each and every parent considers how to support and educate their children on financial literacy, regardless of the aspirations or even outcome of their kids’ careers. Your kids deserve to have these skills and capabilities for reasons easily understood; lessons learned will be extremely helpful and these youngsters will be well prepared for whatever comes their way in life.
The purpose of this material is to plant the seeds of financial literacy which we hope that you will continue to cultivate for your kids and for yourselves throughout your life. Financial literacy is a learned life skill which will help you, not only make sound financial decisions, but will give you great confidence over your financial lives. It’s a much-needed skill for your children, especially if they don’t succeed with a college scholarship; at such a point you too may become vulnerable and in need of sound financial decisions if you were to help guide your kids through the financial burdens of getting a college degree and starting adult life.
As former Federal Reserve Chairman, Ben Bernanke, pointed out, “Financial education supports not only individual well-being, but also the economic health of our nation. Consumers who can make informed decisions about financial products and services not only serve their own best interests, but collectively, they also help promote broader economic stability.” No one can argue that the world would be a truly better place if everyone treated their finances more carefully. Unfortunately, many students in middle school, high school and college, admit to having a limited amount of knowledge when it comes to personal finance. A 2016 U.S. Bank Corp. survey on the personal financial literacy of undergraduate students, between the ages of 18-30, discovered that 44% of participants admitted to having little to no knowledge on creating and maintaining a budget. What’s worse, over 20% of participants admitted to not even using a bank for their financial transactions.
It’s clear that you need to start preparing your own children on basic, personal financial education. If they do get scholarships, things will be much easier for them and for you. If they don’t, you both need to be prepared on how to treat the situation. If your kids make it as professional athletes at some point, then their skills in this area will be valuable in protecting their assets and making sure they grow and last for life after sports. If they don’t make it in pro sports, the knowledge acquired will guide their decisions for their next steps in life. The major point to be made here is that regardless of your kids’ involvement in sports, both you and your children need to have these skills.
Financial psychology for the whole family
Financial psychology relates to our behavior towards personal finances and financial decisions regarding money, budgeting, investing and so on. Family, society and culture play a huge role in the development of a person’s financial psychology. Money is a social tool and our attitudes, beliefs and practices in relation to it, are to a great extent influenced and molded by the people who surround us. In addition, the pursuit of money is all about trying to meet either emotional or psychological desires and identifying these desires will give you greater control over your financial behavior.
According to humanist psychologist Abraham Maslow, our actions are motivated by the achievement of certain needs. Maslow first introduced his concept of hierarchy of needs in his 1943 paper “A Theory of Human Motivation” and his subsequent book “Motivation and Personality”. This hierarchy suggests that people are motivated to fulfil basic needs before moving on to other, more advanced needs. Although this has been designed with the individual in mind, the family planner can view the family as a unit and therefore the Maslow pyramid can apply to the family as a whole.
Maslow Hierarchy of Needs
Maslow used the terms “physiological”, “security”, “belonging”, “love”, “esteem”, and “self-actualization to describe the pattern that, human motivations generally move through. According to Maslow, the higher people climb up the needs-hierarchy, the better their lives will be. It is obvious that financial issues place you in the lower levels of needs. You must first address these lower issues in order to be able to move to the fulfillment of the higher levels of need.
Humans are conditioned to move away from pain and toward pleasure. Let’s think about that in a financial context:
- If you take pleasure in your daily steak or getting the latest iPhone as soon as it hits the high street, it’s easy to justify spending your money on those things.
- If your favorite place for holidays is Hawaii, it’s probably easier for you to save money for tickets and accommodation for your next trip there.
These are all financial decisions that move us toward pleasure—we’re using money to get what we want. We also make financial decisions to avoid pain. The positive aspects of pain avoidance are things like using money to buy insurance to avoid the future pain of paying medical bills out-of- pocket; or putting money in savings to avoid the fear that comes when you get your paycheck and it’s less than you need to cover monthly expenses. The negative aspects come in when we avoid spending money wisely because it’s not as pleasing as spending money on fun. That’s how we get into situations where we spend $7 a day on coffee but don’t have anything saved for retirement.
Often the difference between making smart financial decisions and foolish financial decisions comes down to whether we’re conditioned to think about money in terms of long-term pain and pleasure, or short-term pain and pleasure.
- Someone who knows from life experience that it’s painful not to have enough money for rent or food or medicine will probably take steps to avoid that pain by saving, planning, and thinking about long-term stability.
- Someone who has always been fairly comfortable in terms of meeting their physiological and security needs but uses money to reward themselves or loved ones—that is, someone who’s always used money to meet love and belonging needs—will find it pretty painful to cut back on spending money to buy gifts.
Financial psychology is a very important issue in the overall process of financial literacy, one that your kids will have the opportunity to explore in depth throughout our program. You as parents should recognize the importance of it by making clear-cut attitude decisions and teaching your kids the fundamentals of proper financial psychology.
The first fundamental concerns the whole family and it is the importance of understanding that sport engagement and participation is not geared towards becoming wealthy. Talk to your kids about accepting the financial situation of the family and embracing the fact that there is so much more to life than just money.
The second fundamental is that financial beliefs and behaviors are related to the general psychological principles of needs as a priority and not wants or environmental influences, which are in abundance in our world. Understand that your example as parents will surely influence your kids and teach them to use logic and not emotions when it comes to making financial decisions and creating financial habits.
Moreover, the whole family should distinguish what constitutes good financial behavior; for example, paying the bills and paying them on time and being responsible in spending only the money they can afford and avoiding unnecessary debt. By all means the family should demonstrate the need to stay away from financial risks associated with overspending and the need to stay away from gambling or other risky means of becoming rich overnight; discuss with your kids the need to avoid having glamorous lifestyles beyond their means, or conforming to certain societal expectations.
Another fundamental of financial psychology is to teach your kids to be optimistic and focused on their goals. Discuss how they should control their emotions and make decisions (financial and otherwise) based on evidence, on principles of good practice and on expert and trusted advice, from people who truly wish for them to succeed. Relieve them from any pressure that their financial success is imperative in order to repay your efforts in helping them, or meeting your financial needs and wants. Guide them in appreciating and respecting money for what it is and explain that money does not define success or character.
Being in sports, your kids can already recognize the hard work required to achieve anything; it’s a good chance for you to relate this discovery with the financial position of the family and their future financial position and aid them in realizing what constitutes good and bad financial behavior and how that can affect their life. Kids involved in sports may draw upon and utilize a number of athletic strengths to deal with and overcome financial setbacks. Empower them to withstand societal pressures and expectations regarding their financial behavior and take corrective action whenever necessary. Encourage them to pursue continuous education and lifelong learning on the matter, as that will enhance their career and will help them attain financial independence.
Lifestyle choices
We all have the option to pick out our lifestyle, the way we want to live our life. In order to know how to adopt a lifestyle, it’s important that we understand first what it really means. Lifestyle is the way in which individuals live their lives. Any habits, tastes, moral standards, or anything that makes up the mode of living of a person is always considered their lifestyle. Our lifestyle encompasses our financial lives as well.
Choosing an appropriate lifestyle will allow you to enjoy your way of living. Usually, people who don’t give much attention to what they want from their life, end up taking what’s left for them. As a parent, you should choose the best for you and your family.
Think of your work and your job for example; if you’re having a hard time coping with your work, perhaps it would be best for you to investigate if your work fits your personality. In the case that it doesn’t, then it is highly suggested that you look for something that does. It’s extremely difficult to enjoy something if it doesn’t fit with your likes as a person.
To choose and adopt a lifestyle that suits you and your family you need to consider the following factors:
Fits Your Personality
The first thing you need to consider when picking a lifestyle, as we have mentioned above, is to choose one that fits your personality. For example, if you adore playing football and other kinds of sports, it will be really difficult for you to adopt a sedentary lifestyle.
Meets Your Finances
It’s quite difficult to live under false pretences when it comes to your finances. A lifestyle outside or above your means is quite impossible to sustain. When it comes to picking a way of life, it’s important that you choose one that you can financially afford. Make sure that your monthly income can cover and pay for all of your expenditure and at the same time, make sure that you are still capable of saving some serious money in case of emergency.
Something Realistic (and sustainable)
Choose a lifestyle that you can actually live with, for the rest of your life not just for a month. Make sure your choice is realistic, otherwise you won’t be able to sustain it. If it’s not realistic you will feel depressed, blaming yourself because you couldn’t achieve it. You have to pick one that you know can improve your life. Your choice can either improve or worsen your life.
Goes Well with Your Beliefs
Another important factor to consider when choosing a lifestyle is to choose something which aligns with your beliefs. It’s quite difficult to be successful with a certain way of life, if you know that it contradicts what you believe in. For example, it might be hard to live in luxury if you know that you prefer living a simple life and you believe that “less is more”. Anything that would contradict your beliefs is never regarded as a good fit. So, make sure that you pick a lifestyle that will highlight the best of you and not go against you and your views in life.
Developing a strong set of financial skills and financial goal setting
It is often said that money is the most important thing in the world. Money itself, paper and coins are not important. What is important is that money can give you freedom and choices.
When you have the money, you have the freedom to decide for things such as where you want to live or the choice to hire someone to do all the things you might dislike doing or don’t have time to do, such as cleaning your house, cooking your meals or washing the dishes and use the time you would spend doing that to do something you enjoy, or spend time with your family. On the other hand, when you don’t have much money, choice may be something that you cannot afford; choices and money have a positive correlation. The choices available to you may not really be choices at all. Without enough money, or a true scarcity of it, life can be miserable. The most important use for money though is that they can help you turn the dreams you have today into the reality you live in.
Developing strong financial skills can support both your motivation and the attainment of your financial goals as it allows you to choose the lifestyle you want to have, help people you care about, experience the freedom to do what you want, when you want to do it, live without the stressors and negative emotions often associated with financial struggles and make a positive contribution to society.
Money usually does not change who we are. What it does, is magnify our personal traits inherent to our nature. If you have a mean and selfish disposition, you will have more to be greedy and selfish with. If you are caring, kind and loving, you have more to be thankful for and give. As Tony Robbins put it, “In the end though, what all of us are really after is not money, it is the feelings and the emotions money can create, such as empowerment, freedom, a sense of security and feeling alive”.
You must agree that being able to afford your dream life is an incredible feeling. Imagine having plenty of free time to live life on your terms and at the same time being able to help the people who are important to you. Goals define the action you must take to make your dreams real. Setting goals and priorities, and then following through with active plans to make them happen, is the essential process for turning dreams into reality.
The process of setting and achieving financial goals is very similar to the experience of an athlete setting an athletic goal. If you choose to work with a professional financial advisor to create your financial plan, you are creating an athlete-coach like relationship.
It is important to start the process by identifying your goals, which must be directly connected and in line with what is most important to you and your family and what exactly you want out of life. Discuss your goals with your advisor and set dates for their achievement. Your advisor will then help you quantify these goals and help you build a plan around them. Your ultimate goals are not going to be achieved overnight so you will have to set intermediate goals with events and dates that will help you stay focused and enjoy small victories on your way to their achievement. Intermediate goals also provide a measure to check whether your plan is working or needs adjustments.
Financial advisors are there to help you stay committed to your plan and to provide you with an honest and objective assessment, so you will have to choose an advisor who you feel can understand your goals and has helped other people achieve similar goals. It’s relatively easy to assess our current situation and figure out where we want to be. The toughest part is what happens in between, the actual work to get there. Successful people are not always those who work the hardest or the longest but those who work the smartest. Investors in the same way, should make smart and efficient financial decisions. Your advisor will help you make the right adjustments to keep you on track in your journey to financial freedom.
The process of setting and working towards achieving your financial goals doesn’t need to be perfect. The path to financial security and stability is not usually straight, and you will need to achieve intermediate goals and correct your course along the way. Your goal should be constant progress following the steps we recommended above: identifying your goals, choosing an advisor that suits you, making smart decisions and maintaining balance to reach success.
Dealing with the financial burden of sending your kids to college
Families should start planning early about the possibility of covering the costs for their kids’ college education. Nowadays, a good number of college students undertake to support their education themselves, even though help from the family is not uncommon. Again, this is a topic for discussion with your children, one that cannot wait until the last minute; the sooner a plan is laid down and agreed within the household, the more the benefits arising from good preparation. It is very important to also recognize that student loans are not the only solution and sometimes it’s not even a viable one, given that repaying the student loan could take more than a decade – if you are lucky – and will take away a good part of the quality of life your kids should have as adults. The current US crisis regarding student loans is very indicative of the above.
Lowering costs for college can include options such as choosing to go to an in-state school, a public rather than private college, choosing accommodation wisely, perhaps even delaying going to college especially if your kid will opt to qualify as an Independent student, under the Higher Education Act. It is obvious that part-time work could help, especially if the work is related to the field of study and adds value to the overall experience. But let’s face it; these are just supplementary steps to the grand scheme of things, which is being able to fund a university degree without going into debt or bankruptcy and without putting the quality of life for the entire family under scrutiny and potential jeopardy.
Investing towards a college education is perhaps a primary goal, a joint decision between your kids and yourselves, which should be taken as early as possible; even if it is only a precautionary measure. Start off by the simple measure of learning and also teaching kids to save some money on a monthly basis. Compounding interest, the process by which the value of an investment increases exponentially because it earns interest both on the principal and on the prior interest payments, can work very well for your family.
Funding a child’s education should start as early as possible and there is variety of options to start saving for your children’s education:
- A Life insurance policy can be used to fund college education and as a guarantee that in the event of a premature death of either you or your spouse, your child will have access to sufficient funds to finance a college education. Cash value life insurance, especially, is ideal for this purpose. It’s designed as a permanent form of life insurance that includes a death benefit component and a savings (cash value) component, which earns a rate of interest and normally accumulates tax free. The child can utilize the insurance proceeds upon the commencement of the studies or if you choose, you can take out a loan up to the amount of accumulated savings from the insurance at a low rate of interest.
- A Custodial account is a savings account in your child’s name that you (or any other person set as the custodian) control until your child becomes an adult. You can set up an account easily at any bank and you can deposit or withdraw money without any restriction for your child’s benefit. The downside is that you can’t switch beneficiaries on the account: once they are set, your child will have complete control over the money as an adult, even if he or she decides not to study. Another drawback of custodial accounts is that they are taxed at normal rates.
- Offered by every state in the US, 529 plans (College plans) are portfolios of mutual funds with tax advantages when saving and paying for higher education. There are two major types, prepaid tuition plans and savings plans. Prepaid tuition plans allow the plan holder to pay for the beneficiary’s tuition and fees at designated institutions in advance. Savings plans are tax-advantaged investment vehicles, similar to IRAs. The 529 plan can also cover tuition to overseas universities as long as they are included in the Education Department’s list of eligible schools.
- Coverdell accounts were created by the US government to help families save money to pay for qualified education expenses. They can be opened for anyone under the age of 18 but assets must be withdrawn before the recipient reaches the age of 30. Contributions to these accounts are limited to $2,000 a year and are not tax deductible, but grow tax free until withdrawn. When the contributions are withdrawn, they are tax-free assuming that they are less than the account holder’s annual adjusted qualified education expenses; if they are higher, the gains are taxed. There are also restrictions to Coverdell accounts that make them a not so attractive option. Contributions are limited to $2,000 a year and parents who earn more than $110,000 a year ($220,000 if filing a joint return) are not eligible.
Whatever method you choose to help finance your children’s future studies, always remember that you should start saving early, preferably when your child is born. Any amount of money you manage to save, you won’t have to borrow later. And always have in the back of your mind that a scholarship is not guaranteed by anyone, therefore you, as parents should strive to guarantee a better future for your children through providing them access to higher education.
Watch the video below for a simple break-down of the 529 plan:
How much you need to save every month to pay for your child’s tuition
Lesson wrap-up
The key takeaways from today’s lesson are the following:
- Money is a tool which helps us turn our dreams into reality
- Our financial beliefs and behaviors are related to the general psychological principles of needs, wants and environmental influences
- Our financial psychology and mindset about money is influenced by our family, society and culture
- Emotions and money are interconnected
- Our financial behavior can change if we change our strategy
- Our lifestyle choices affect the achievement of our dreams
- Financial knowledge enhances our ability to achieve our lifestyle goals
- Our money personality influences our spending and saving habits
- Parents should start planning early for the financial burden of sending their kids to college
Action steps – Exercise 2 (6-8 minutes)
Ask parents the following questions and ask them to answer with a Yes or No.
- Have you ever paid your bills in front of your children or are you trying to shield them from such activities?
- Do your kids know that money is limited, i.e., money doesn’t grow on trees?
- Do your kids know even at a basic level anything about money, like where do they come from?
- Have you ever tried to teach your kids how to manage their money, for example by imposing a budget that they have to stick to?
- Have you ever made your kids save for something they want, instead of just buying it for them?
Based on the parents’ answers, discuss the extent to which you they have educated their children financially thus far.
At this point we will wrap up today’s lesson. First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have. Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to your athlete kids and your family!