The most important financial skill children can learn?

March 22, 2013

| Money Rates Columnist

Financial Literacy Month (April) is a natural time to teach your children about money. But of all the financial skills you can impart, which is the most important? The resolve to save money? The restraint to forgo debt? The foresight to make sound investment decisions? While these are all valuable talents, there may be one skill that comprises all of these abilities and more.

The ability to delay gratification is a cornerstone of most successful financial strategies. Being able to turn down short-term rewards in favor of long-term gains is a key skill for saving, budgeting and investing. Conversely, the inability to resist short-term pleasures -- especially when they endanger your long-term well-being -- is one of the most common causes of financial ruin.

More than 40 years ago, a famous study suggested that a willingness to delay gratification may be something that people acquire early in life, and that those who have it may become more successful than those who do not. But more recent data indicate that the way children approach delayed gratification may be more complex than previously thought. That complexity may hold clues on how you can prepare your children to make better financial decisions as adults.

One now or two later?

Until last year, much of the conventional wisdom on children's ability to delay gratification came from a 1972 study by Walter Mischel of Stanford University. It has been commonly known since as the "marshmallow study."

Researchers in this study presented children with a single marshmallow, explaining that they were free to eat it. But they told the children that if they resisted eating the marshmallow until the researchers returned in 15 minutes, they would get a second marshmallow, at which point they could eat them both. About one-third of the children in the study waited long enough to receive the second marshmallow.

The immediate results weren't what made the study famous. More than 10 years later, Mischel conducted a follow-up survey that revealed that the children who waited long enough to get a second marshmallow were rated by their parents as significantly more competent in terms of rationality, attentiveness and their ability to deal with stress and frustration than the other children in the study. This suggested that the restraint the subjects demonstrated as children may have set them up to be more conscientious and successful later in life. A later study indicated that children who waited for a second marshmallow also scored better on their SATs.

The results were encouraging -- at least to parents of children who could resist a marshmallow for 15 minutes. The notion that this type of restraint could be linked to success when they were older painted a less-optimistic picture for the children who demonstrated a weakness for marshmallows. Or at least it did until a 2012 study added a new wrinkle to the original marshmallow study's findings.

About those crayons …

In October 2012, University of Rochester researchers released findings from their variation on the marshmallow study. In this case, they wanted to test not only the children's restraint but also their faith.

Researchers broke the children into two groups. In the first group, the children were promised certain supplies for an art project, which researchers delivered a few minutes later. This was dubbed the "reliable" group. In the second group, the children were promised the supplies, but a few minutes later the researchers told them that a mistake had occurred and that the supplies weren't coming. The researchers repeated this process of deception a couple of times with the children. This was the "unreliable" group.

Then came the marshmallow test. The difference between the two groups was striking: On average, the reliable group waited more than four times as long before eating their marshmallow as the unreliable group. In fact, only one of the 14 children in the unreliable group waited the full 15 minutes. The researchers concluded that children's expectations -- specifically, whether they believed that waiting would yield actual rewards -- may play an important role in their willingness to turn down immediate perks.

The financial connection

What significance does the follow-up to the marshmallow study have to financial matters? It may suggest that children who haven't observed delayed rewards in action -- similar to the group that was denied the art supplies they were promised -- may be less likely to pursue those rewards. In other words, children who don't believe or understand that a second marshmallow will come see little harm in eating the first.

In the financial world, that second marshmallow could amount to things such as savings account interest or a lower borrowing rate -- perks that must be earned through patience and restraint. But if you had never experienced these types of benefits -- or worse yet, you didn't fully understand how they work -- how willing would you be to set aside immediate pleasures to pursue them?

For those who haven't experienced the financial upsides of delayed gratification, it may even be hard to believe that the rewards truly exist. A 2006 survey by the Consumer Federation of America indicated that 16 percent of Americans believe that winning the lottery is the most reasonable way to accumulate a significant amount of wealth for retirement -- not only for the respondents themselves, but for anyone. It's worth noting that this was before the Great Recession.

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