All the way back in Lesson 5, I emphasized the importance of educating kids or young adults on financial and investing literacy. The aim of this lesson is talk to a bit more of what kinds of strategies and activities parents can do with their children to help achieve a starter level of knowledge around finance.
The main struggle adults have with teaching their kids about financial literacy is that they lack the confidence in their own finance and investing knowledge. Some people may shy away or may not feel comfortable talking about money, regardless of with whom. However, deep technical knowledge in finance is not required to educate kids about the importance of money, earning money, saving money, and what it can be used for. Money shouldn’t be a taboo topic of conversation. It’s one of the things we all have in common in living day to day life. Everyone needs money, and everyone uses money.
Another main challenge in all of this is getting your kids actually interested and curious about money and finance. This can only be done by engaging their curiosity at a young age and involving them (at a high level of course) in your own day to day money decisions.
Start with the basics.
Money is used as a means to an end for almost every transaction that happens on a daily basis, so why not get your kids involved at a young age on how money works. Start with explaining what money is and why people need it. Everyone needs money to live on a day to day basis so they can buy their basic necessities. Simple exercises like explaining where money comes from and how it is earned, along with how it is spent and what it can buy you will help kids understand the transactional nature of money. Bringing your child with you when you go to the bank or when you go shopping is something very simple that can show how money is used and what it is required for.
Take it one step further.
Introduce kids to basic things like what a chequing and savings account is at a bank and how each account can be used. Many parents will give their kids allowances for carrying out chores around the house. This will introduce to kids the concept of why people work and earn money for doing a job. Parents can show kids the process of depositing money once they have earned it and introduce the concept of saving. Having kids look after their allowances will give them some freedom and opportunity to essentially “manage” a small pool of money for themselves. Of course, parents can limit this amount as I don’t think it’s a wise idea for 6 year old Timmy to be deciding the fate of $1,000. Again, this exercise gives kids more independence to practice saving. If your child wants to save up for “something”, have them explain to you why it is a good idea that they need that item. Is it a want or a need? Get them to justify and practice critical thinking skills around spending decisions. I watched an interview on BNN recently where the woman executive was saying how she makes her children create very simple business cases for when they want to buy something with their allowance money. Although we aren’t expecting a Harvard Business case review for Timmy’s Tonka truck, this exercise does get kids thinking about the importance of money decisions and the short and long term implications of whether to purchase something or not. During this exercise, it might be valuable to teach the importance of long term saving for something further down the road that might be more expensive, and therefore, requires time to save up for.
Here’s a different idea… instead of timeouts, being grounded, or taking away their video game privileges, parents could punish their kids by “fining them” and charging them a part of their allowance for misbehaving or breaking some sort of house rules. This will expose children to the financial repercussions and penalties for “breaking the rules”, and while this may seem silly at first, this is no different in real life than getting a speeding ticket, receiving a penalty on late tax return submissions, or getting fined for improperly disposing of certain household waste products.
Getting to the finish line
Now that your kids are getting older and have a decent background on the logistics of money, at some point they will have their own bank accounts. Parents can reiterate the purpose of different bank accounts, and should feel free to have someone working at their local bank to maybe explain some details around bank accounts, how they work, and what they are used for. Introducing young teenagers to longer term saving goals like retirement, school, a vehicle, or a house will begin to expand their awareness on the financial decisions adults make on a daily basis. There are a lot of beginner books on money and finance that young teenagers can read to enhance their own money management knowledge. Don’t be afraid to show your kids your own bank accounts, and the different transactions that have occurred over the past month which resulted in money coming in and out going from your account. Parents can open up an RRSP or RESP account with their child present to expose them to this process of creating accounts for long term money savings.
Crossing the finish line
Finally, when your children are reaching a mature age and have a well-rounded background of money management, start introducing them to investing. It doesn’t have to be complicated. Something simple like exposing them to different products offered at banks like GICs or Canada Savings bonds will teach kids the concept of saving money to grow that pile of money some more. This will introduce to them the topic of compounding interest. If you feel uncomfortable with this topic, feel free to reach out to a financial advisor at your local bank to give a high level explanation of these financial instruments, how they work, and the purpose of them. Advice like this is free after all. Get kids into the habit of considering an alternative path with their earned money instead of spending it or saving it for some specific material item in the short term. Explain to your kids the concept of saving for retirement, when does retirement happen, and that at some point down the road, you won’t be working anymore and will still need money to live.
Perhaps when your kids are a lot older and entering young adulthood, they may be even considering a career in finance. Encourage your kids to speak with a career advisor at their high school, or maybe with a family or friend in the relevant profession, about potential paths to take post-secondary. Having your kids enrol in a job shadowing program will give them real world and hands on experience in the day to day life of a particular profession.
Regardless of the career interest, ensuring that kids have a high level of financial literacy and a good understanding of money by the time they reach young adulthood is key for them to reach financial independence at an early stage in adult life, and to get them into the habit of critical thinking when making any money decision. As a parent, this teaching journey may even prove to be educational for you, and highlight gaps in your own financial literacy. It doesn’t require a CFA designate or an MBA graduate level of finance to set your kids up with the basic principles of managing money, and to frankly get them excited about dealing with money and thinking differently when making any money decision.
After all, isn’t it a parent’s dream to retire and go live with their financially independent kids?