facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Integrating the Psychology of Money into Financial Literacy Education Thumbnail

Integrating the Psychology of Money into Financial Literacy Education

Financial Education for Kids

Over the last several years many provinces across Canada have been ramping up the focus on financial literacy in schools, and for good reason. When I was in high school the only program – which was elective, that taught anything about finance was economics. You learned about supply and demand & fiscal policy, for a 17-year-old these concepts in my opinion were years ahead in terms of relevance when we should have been learning about interest rates, managing money, debt, and investing. My first experience with interest rates was when I was 18, away at school, and applied for my first credit card.  I had no idea at the time that purchases made on a credit card would be charged interest if you didn’t pay it off that month and what the downside of not making your payments on time would be. Certainly the 21-year-old – fresh out of school bank employee administering the credit card application in the student’s lounge didn’t explain that. To the best of my knowledge, we didn’t learn anything in my high school economics class about budgeting or saving, investing, and debt. If you are not learning it at home, from your parents – which so many children are not, then the children are left with what information is available to them when they go to school.

Today students from grades 4 to 12 learn about saving, spending, investing, and managing money. These new learning opportunities available in Canadian classrooms proceeded a 2008 national survey of parents and teenagers by Credit Canada and the Ontario Association for Credit Counselling Services. The study found that almost half surveyed ranked "how to save money" as the most important topic to learn about, which at the time was completely missing from any school curriculum.

The Missing Piece: Psychology of Money

As we sit today, much progress has been made since we were in school to incorporate financial literacy into the mainstream curriculum. If you are a client and avid reader of our newsletters you will not be surprised to know that our opinion on this is that while teaching the basic fundamentals about money is so incredibly important, we may still be missing a crucial piece of the puzzle: the psychology of money.

A recent study of middle-school students in Italy found compelling evidence that financial education can have a causal impact on financial behaviours. The study showed that students who took a financial literacy course were significantly more likely to make better decisions in money-related tasks compared to a control group.

However, anyone who has ever made a New Year’s resolution to save more or spend less knows that simply understanding what we should do doesn’t always translate into consistently formed behaviours. Adults can easily learn the basics of budgeting, compound interest, and diversification. The real challenge is in applying that knowledge consistently and making it habitual.

This is where behavioural finance comes in. Over the past few decades, researchers have uncovered numerous ways in which human psychology influences our financial choices, often leading us to the opposite of what we know is the right choice. A large part of becoming a CFP Professional requires the ability to dissect a case study, offer several appropriate solutions while at the same time identifying exactly which cognitive biases the client might be dealing with as well as uncovering your own biases that might be present as an advisor, and how to appropriately navigate so biases don't form part of your recommendations and impede the clients decision making. The CFP curriculum placed just as much importance and emphasis on understanding human behaviour as it did access if you were recommending the appropriate strategies to your client. That’s how important it is.

The Challenge of Present Bias

Take the concept of “present bias” for example. We tend to place disproportionate weight on immediate rewards compared to future ones. Every financial choice can be boiled down to a trade-off. Want to save for a future goal? You have to give up some current consumption (painful) in exchange for some future reward (joyful).

But the psychological weight of either the pain or the joy is affected by when we perceive it happening. The pain of giving up consumption today is magnified precisely because it’s being felt now. The joy of having a large pot of money in the future is minimized because it’s in the future and we can’t enjoy it now.

I have recently implemented a structured chore/allowance system with my almost 8-year-old daughter giving her the ability at any time to make additional allowance dollars for doing things outside of her day-to-day chore responsibilities. To no surprise, she has already demonstrated that she is very motivated to make her own money. However, the conversations I am having with her now are to allow her money to accumulate so that she can save for something big and something special she might want down the road vs. spending it as soon as she earns it. In trying to teach my daughter about fighting immediate gratification vs. delayed gratification I realize that I have these same conversations with my clients.

An 8-year-old is no different than a 40-year-old in this scenario – this is where the psychology of money comes into play, this helps explain why it’s so hard to save for retirement or stick to a budget when tempted by immediate purchases.

In a fascinating study where people were asked to choose between a healthy snack and a sugary treat for a seminar happening in one week, making the decision in advance, about 74 percent opted for the healthy option. But when asked again on the day of the seminar, the results completely flipped – suddenly 70 percent wanted the sugary snack. This dramatic shift in preferences as the moment of choice draws near mirrors how we often intend to save more but end up spending in the moment.

Implementing Real-World Financial Education

These insights from behavioural finance have profound implications for how we approach financial education. By teaching students not just the mechanics of money management, but also the psychological pitfalls that can derail good intentions, we can equip them with more effective tools to navigate real-world financial decisions.

Some ideas for enhancing financial literacy programs:

  • Incorporate lessons on the psychology of money and how it affects financial choices. If we know better, we do better!
  • Teach strategies for decision-making, such as setting up automatic savings transfers to help avoid the influence of present bias.
  • Use visual aids and exercises to make long-term financial goals feel more realistic.
  • Discuss the emotional aspects of money and how to manage financial stress.
  • Explore how social influencers and advertising can shape spending habits.

By blending traditional financial education with insights from behavioural science, we can create more engaging and effective curriculums. Students might find discussions of psychological quirks more relatable and memorable than dry facts about interest rates. This approach could help bridge the gap between financial knowledge and action.

In the world of personal finance, knowing what to do is only half the battle. Understanding why we often fail to do it and how to overcome those obstacles may be the key to truly improving financial well-being for generations to come.