When it comes to teaching financial literacy, you play a vital role in how your kids will manage their money in the future. Here are ways to raise smart money managers.
Teach them to save. Many families are only one job loss, medical crisis, or legal issue away from falling into serious financial trouble. Understanding the value of saving is a simple first lesson in personal finance. Provide a piggy bank for your youngster to collect change. Later, open a personal savings account in your child’s name for them to squirrel away half of all of their earnings and monetary gifts.
Budget together. Demonstrate to your kids how you manage expenses like groceries, bills, mortgage and car payments, while still setting some money aside for savings like university, retirement, and emergencies (a rainy-day fund). If your own financial history is spotty, talk about how poor budgeting decisions have caused you problems.
“There is nothing wrong with being honest with children and letting them see you improve yourself. It’s a very valuable and humbling teaching opportunity,” says Tonya Jensen, a financial adviser.
Discuss the importance of living within (some experts recommend below) your means by prioritizing necessities and carefully choosing the types of items that you purchase on credit. Stress the importance of paying off credit cards to avoid getting saddled with long-term debt.
Help them understand debt. Does your child receive a weekly allowance? Next time they ask you to borrow money, create an I.O.U. and bill them for your loan.
“When it’s payday, lay out the money they are to receive. Then, go back to the debt they owe you and take it away,” recommends economic educator Latoya Goree. For example, if your child receives a $10 allowance and owes you $7, lay out 10 loonies and take away seven to collect on the loan. Your child will realize that they’ll have to manage on $3 until next payday. “This gives them a visual example of what it means to be in debt and how it feels in the moment,” says Goree.
Teach them to plan ahead. Maggie Root says that any money her sons, ages 12 and 17, earn or receive is divided three ways: 50 percent toward extras, 30 percent for education, and 20 percent for charity.
Offer incentives. Root’s oldest son, Jack, uses a portion of his earnings from his part-time job toward his car insurance. “We agree to pay for his vehicle and tags as long as he meets our requirements for academic and leadership performances,” says Root.
Balance a cheque book. Open a chequing account for earnings that will cover expenses like gas, insurance, and entertainment. Although many people use debit cards and banking online, kids should still learn how to write a cheque and balance a cheque book.
Borrow smart. If a kid gets in the habit of only making the minimum payment on a credit card during their university years, they’ll start off their career under a burden of debt. Plus, the accrued interest can negatively affect their credit score, making it harder for them to buy their first home or car.
Student loan debt is another area where young adults can get into trouble. Encourage your child to only borrow what they need, even if they qualify for more. “If they borrow too much, it affects their ability to maximize their income later,” says Goree.
Raise an investor. Root helped Jack set up a small investment account to manage. “He really took to it and has used this in his high school business class,” says Root. “He has a good understanding of the stock market compared to his peers,” she says.
Give back. Help your child understand the value of giving back to their community. “Charitable giving builds character,” says Goree. It builds commitment to the community and it builds integrity as you are producing productive citizens for society.”
Financial literacy by age:
Kindergarten to Grade 6 - Learn to save. Make choices: “What purchases are you willing to give up in order to have what you want most?” Consider offering allowance for extra household chores at around age 10.
Junior High - Learn the basics of budgeting. Manage first-time earnings into savings and weekly expenditures.
High School - Budget earnings, discuss credit cards. Plan for future needs like education or for a new or used car. Learn about investing and the importance of charitable giving.
Source: Latoya Goree
Christa is a nationally-published freelance writer and mom of two sons.
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