New Research Shows Children Form Attitudes About Money at Young Age

 The U.S. is the richest country in the world, yet economists estimate that at least half of Americans won't retire with enough money saved to maintain their current lifestyle.

So, in order to develop interventions to reverse this trend, researchers must understand how people form spending habits, and when.

A new University of Michigan study, co-authored by Michigan Ross Professor Scott Rick, found that children as young as five already had distinct emotional reactions to spending and saving money, and that these translated into actual, real-life spending behaviors. The findings also suggest that these emotional reactions and spending behaviors weren't modeled after their parents.

The Spendthrift-Tightwad Scale has long been used to measure adults' emotional reactions to spending money, said study lead author Craig Smith, research investigator at the U-M Center for Human Growth and Development.

Tightwads experience emotional pain connected to spending, where spendthrifts lack that emotional brake system, tending to overspend and carry more debt as a result, he said.

In the study, the authors created a Spendthrift-Tightwad Scale for Children, and asked 225 kids various questions about their emotional response to saving and spending.

Children were oriented along the scale based on their answers, and then researchers examined whether these emotional reactions translated into actual spending behavior when researchers gave kids a dollar to spend on toys or save.

Kids on the spendthrift end were more likely to buy and tightwad kids were more likely to save, Smith said. Parents independently provided data on their child's reactions to spending and saving, and these verified the accuracy of the child's self-reports.

"We showed that, in 5-to-10-year-olds, one's emotional response to spending and saving is a useful predictor of what you do with your money, and that these emotional responses predicted actual behavior even after controlling for how much children liked the store items," Smith said.

In other words, even if spendthrift-leaning children weren't crazy about an item, they were still more likely to buy it anyway.

"This is similar to adults, in that beyond how much they like the item, their emotional orientation towards spending and saving uniquely predicted if they spent or saved," Smith said.

Also, four times as many children were classified as tightwads than spendthrifts, which also holds true for adults.

“The research suggests that parents can help their children understand why they bought something or want to buy something,” says Rick. “Spendthrift children will often buy something even if they are only mildly interested in it. They just don't experience enough pain of paying in the moment. That combination — mild interest and no deterrence — is a recipe for a lot of regrettable purchases."

Smith was surprised that children so young could report their emotional responses accurately.

"We did not necessarily expect this in very young children, and it raises all kind of developmental questions," he said. "How do these orientations develop? Are they connected to temperament, naturally occurring, or are they learned from modeled behavior?"

So, if kids have little to no buying power, why look at their attitudes toward spending and saving? Because, Smith said, early spending behavior might foreshadow poor financial decisions later in life, and it's important to intervene early to get people on the right financial track.

In the last decade, financial literacy classes in which younger kids learn about checking and savings accounts and the value of money and goods have grown in popularity. If spendthrift kids were identified early, special interventions could help them learn to think about the negative consequences of overspending.

Rick says the research shows parents can and should teach their kids about money much earlier than previously thought.

“If parents wait until their children are teenagers to have serious discussions about money, they've already let a pretty formative decade pass,” he says. “Our work suggests that those important conversations need to start earlier than many parents expect. We can't yet provide much guidance on the content of those conversations. But we're currently investigating what elements of parent/child conversations about money influence children's feelings toward spending money.”

Parents completed the adult version of the tightwad-spendthrift scale, and researchers didn't find any significant relationship between a parent and their child's placement on the scale. Smith said this could be because the child scale asked different questions. A study is under way to test this connection more carefully.

"Spendthrifts and tightwads in childhood: Feelings about spending predict children's financial decision making," is scheduled to appear in the Journal of Behavioral Decision Making. Co-authors include Margaret Echelbarger and Susan Gelman of the U-M Department of Psychology. — Laura Bailey, Michigan News

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