From their first visit from the Tooth Fairy, to their first job and first credit card, your kids are going to have to learn how to manage money. How can you help them do it well?
Start early, advises Chartered Professional Accountant Robin Taub of Robin Taub Financial Consulting in Toronto. “It’s never too early to start educating your child about money, especially if he or she is asking about money or asking for things,” says Taub, who authored the book A Parent’s Guide to Raising Money-Smart Kids, published by the Chartered Professional Accountants of Canada. “This tends to begin around age five. Take advantage of your kids’ natural curiosity to begin the conversation about money.”
Start with some basic concepts, says Chartered Professional Accountant Alan Munro, a Senior Financial Advisor with Assante Capital Management Ltd. in Mississauga. “Children need to be introduced to the concept that things cost money, that money is earned, and how much work it takes to earn it,” says Munro.
Help your child focus on the fundamentals of managing money. “First you have to earn money,” says Taub. “Then you have choices to make about saving, spending, donating and investing.”
Young children can be encouraged to make money through odd jobs or chores to earn an allowance. “Try to instill the notion that they can save their money,” advises Munro. “Instead of spending smaller amounts right away, they can accumulate the money they receive as gifts and end up with a substantial amount to buy a bigger item.” To teach kids to allocate their funds to saving, spending, donating and investing, Taub suggests using a multi-slotted piggybank, which is available online.
Older children need to gain experience making financial decisions. “Start talking about budgeting and connecting their allowance to their budget,” says Taub. Older children can also open a bank account and start to accumulate savings. “Kids at this age start to take an interest in more expensive items, like the latest clothes and electronics,” says Munro. “It’s a good time to make the point that they don’t always need to have the latest, most expensive item.”
Teenagers who work during the summer need to learn how to deposit their wages and how to file a tax return. “Teens should be encouraged to contribute to the cost of their hobbies and other activities,” says Munro. “Older teenagers can also start saving for post-secondary education.” The teen years are also the time to make sure your child understands credit. “Explain what ‘buy now, pay later’ really means and review credit card basics,” advises Taub. “Discuss how to use a credit card responsibly.”
Young adults attending college or university need to understand how to handle student loans and develop a plan to pay them off, says Munro. “If they have credit cards, it’s important for them to pay the balance off each month, or they will be hit with very high interest costs.” When your children get their first full-time jobs, Taub suggests you make sure they understand the difference between gross and net pay, as well as their tax, Canada Pension Plan and Employment Insurance obligations.
The Art of Saving – Another important lesson to impart is the importance of saving while young, to take advantage of the magic of compound interest, advises Munro. “Young adults should also be encouraged to invest in things that will appreciate instead of depreciate,” he adds. “A new car begins to lose value right away, but an investment in real estate or in a financial instrument will appreciate in value.”
Be a good financial role model for your children. “Actions speak louder than words,” cautions Taub. “Kids are aware of how their parents manage money. Get your own financial house in order so you can lead by example.”
While some may argue that today’s kids know less about money management than past generations, today’s financial world is more complex than the one their parents and grandparents inhabited. “For earlier generations, cash was king,” says Munro. “Now, credit is easily available and it’s easier to get into trouble with debt.” Today’s kids also use new financial products. “With prepaid credit cards, Interac Flash and the coming mobile wallet, there is simply more to know and manage,” says Taub. “Kids need our help at home and at school to become truly financially literate.”
So how do you start the conversation? “Introduce the concept of budgeting and saving up for things they want to buy,” suggests Munro. Taub adds that back-to-school and holiday shopping are great opportunities to sit down with your kids and create a budget for what they want. “Have them go through ads looking for sales and encourage them to comparison shop for the best deal,” recommends Taub. “Let younger kids pay the cashier and count the change. If you are paying with your credit card, explain to your older children how credit cards work. At all ages, talk about the importance of saving and giving back, either in time or in money.”
Watch for opportunities in everyday life to discuss money with your kids. “You don’t have to schedule a family conference to have great conversations with your kids about money,” says Taub. “The trick is to recognize those ‘teachable moments’ and take advantage of them.”
© 2015 Chartered Professional Accountants of Ontario