How can I Teach my Children to Get Money Smart from an Early Age?
01 August 2023 0
01 August 2023 0

Enriched Academy Staff

As adults, we all know the critical importance of managing money wisely and the impact our financial situation has on our overall well-being. By equipping our children with financial literacy from an early age, we empower them to make informed decisions, set financial goals, and build financial independence.

As parents we do our best, but there are lots of life lessons we need to teach, and teaching about money doesn’t always top the list. We may also not be the best person for the job since around 50% of adult Canadians live paycheque-to-paycheque! Case in point, many well-meaning parents set their kids up with a bank account, but they should actually open two accounts, one for spending and another for saving (just like adults should be doing!). So how do we choose what financial lessons, habits, and tactics to teach our children, especially if our own money management skills may be lacking?

For many years, Enriched Academy has been working with provincial governments, education boards, colleges, and universities across Canada to support students and teachers with an informative and entertaining package of learning resources to help youth get money smart. We are continuously refining our school programs based on student and teacher feedback, changes in the economy or legislation, and the latest trends in personal finance. We know that learning about money management from an early age will set them up for a lifetime of good financial habits. Financial education for kids is what we do, and we have compiled the following list of lessons, techniques, and the factors you should be considering when it comes to teaching your kids about money.

What are some age-appropriate money lessons for young children?
Give your child a regular allowance, just don’t call it an allowance! Weekly ‘pay’ starting around age seven is a good idea but be careful — it’s not something that’s received, it’s earned — and children need to know the difference.  A checklist of weekly tasks and some amount of pay attached to each one is a great way to instill this idea. Reinforce the concept by designating a regular ‘payday’ each week. This allows children to learn from a young age that that work is the basis for earning money. When they get a little older, encourage them to allocate a portion of their ‘pay’ for spending, saving, and giving to others or charitable causes.

Wants vs needs & cost vs value
Teach children to differentiate between needs and wants and how to prioritize what they spend their money on. Value and cost are two more important concepts to differentiate. A top-of-the-line iPhone or a carbon-fiber mountain bike will really impress their teenage friends, but a cheaper version may perform very similarly and provide a lot more value, especially given the limited amount of funds they have. Kids are bombarded by marketing messages, and they need to learn how to avoid hype and be objective, so they can make smart financial decisions. There is a reason plenty of rich folks (even billionaires like Warren Buffett) drive basic cars – it’s all they really need.   If your teen or tween wants the latest and greatest must-have item, challenge them to explain the value beyond being new, trendy, or fashionable. When they want to buy something, encourage them to research the product, read reviews, and compare prices to make informed decisions.

For younger children, don’t always limit them to buying things that meet your threshold for play value or quality – let them buy some junk once in a while and use the opportunity to turn it into a lesson about quality and value. A mood ring is usually interesting for about a day-and-a-half, and $5 won’t break the bank. If someone learns to better evaluate their purchases in the future, it was a cheap lesson.

Introduce basic investing concepts
As kids get older, introduce them to basic investing and the concept of how to make money with money. Explain how investments can grow over time and the power of compound interest. Should you buy a stock (or an ETF, GIC, mutual fund or some other financial product) for a 12-year-old… absolutely!  There are lots of kids out there with parents who invested the time to explain shareholding and how it works at a level they can understand. Kids are very familiar with many publicly traded companies like Disney, Roblox, Mattel and McDonalds. Holding a few shares (in an informal trust account or simply in your name) may not return enough to put them through college, but it will teach them the basics of investing, risk and return for managing their finances in the future. 

It sounds so cliched to say, “make savings a habit” and it really is only half the picture — your teenagers should be saving and INVESTING a portion of their income regardless of how insignificant it may seem. Developing a saving mindset early in life will pay back over the course of a lifetime, but developing an investing mindset will pay back HUGE over the course of a lifetime and set your kids up for long-term financial security and wealth building. As soon as your kids turn 18, have them open a tax-free savings account (TFSA) even if they can only muster $50 or $100 monthly to contribute.

Teach about credit and debt:
Introduce the concept of credit and debt in age-appropriate terms. Explain how credit cards work, the importance of responsible credit card use, and the consequences of accumulating debt. Don’t give an advance on their allowance! The number one financial problem in Canada from young adults to retirees is spending money they don’t have – usually with a high-interest credit card. The need for instant gratification is an ongoing battle but developing resistance at an early age will help keep the urge under control in adulthood. Practice delayed gratification and help your kids understand that they cannot always get what they want immediately.

Why is it important to teach kids about money management?
Credit is very easy to access these days and even first-year post-secondary students are often able to get a credit card. Easy access to credit cards (with generous spending limits and 20% or more interest!) and a few spontaneous/poorly thought-out spending decisions can derail a future before it even gets started. Failing to understand the impact and obligations of a student loan can also lead to a nasty surprise when it comes time to repay that money or get a car loan or mortgage down the road. Although federally issued Canada Student Loans are now interest-free, provincial loans may still carry interest. Either way, your kids need to realize that a student loan isn’t free money and that paying it back will definitely crimp their post-graduation lifestyle. Many parents are quite literally paying the price for their kid’s financial mistakes, and it can continue long after they are no longer children!

How can I explain the concept of saving money to my kids?
Help your kids set short-term and long-term financial goals. Whether it's saving for a new toy or saving for college, having goals encourages discipline and delayed gratification. For large-ticket items, set up a savings goal and create a tracking chart together with your kids so they can visualize their progress. Celebrate financial milestones and acknowledge their financial achievements, such as reaching savings goals or making smart financial choices. Positive reinforcement encourages good financial habits.

Should I involve my child in family financial discussions?
While you may not want them balancing the cheque book, involving your kids in family financial discussions is a great way to see what they know (and don’t know!) and provide a few timely lessons. It will also encourage them to come to you when they have money questions and need some guidance. Planning a family vacation together is great for teaching teens about budgeting and balancing wants versus needs. They will learn a lot about tradeoffs and how a nicer hotel with an amazing pool may come at the cost of eliminating a particular excursion.... or find other solutions such as grabbing lunch at a supermarket or convenience store instead of a sit-down restaurant.

Open one bank account for spending and one for saving
Bank accounts are free and easy to get online, and having two accounts is one of the best ways to manage money. It’s a very effective and easy way to control spending and ensure your offspring are hitting their savings goals. Whether it’s a birthday cheque from grandma or earnings from a part-time job, make an agreement with your kids to ‘pay themselves first” and put 15% (or more) into a high-interest savings account. The balance of the funds can go into a daily chequing account with a debit card, and they can spend that as they like. Don’t let them dip into their savings account (unless they are parking cash there for a pre-determined, ‘big-ticket’ item).

Teach teens about financial scams
Education and awareness about common financial scams and how to protect themselves from fraud and identity theft is a critical aspect of money management for teens. Our seemingly computer savvy youth often take for granted the importance of safeguarding their financial information. Passwords and PIN numbers need to be protected, never shared, and changed on a regular basis. Young adults also need to be able to detect the proliferation of increasingly sophisticated telephone and online scams.

Remember that financial education is an ongoing process, and it's essential to tailor your approach to your child's age and level of understanding as they learn about money. The key is to make financial education practical, relatable, and enjoyable, so they can build a strong foundation for their financial future. Encourage openness about money and create an environment where youth feel comfortable discussing money matters with you. Starting to instill good money habits from an early age and being a supportive resource as they develop their financial skills will help your money-savvy kids grow into financially responsible, money-savvy adults.

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