This post is written by Jordan Lavin at Ratehub.ca
It’s funny that the topic of money was taboo for so many of us growing up – because our finances become such an important part of our lives as we get older.
As kids, we learned how it’s not polite to ask someone how much they make. Our parents discussed the family’s finances in private. Allowances were sometimes earned and sometimes gifts were received, but they were rarely used for anything more than saving up for a new video game or toy. Our savings accounts were little more than neglected bank books. And when we grew up, we still had a lot to learn about how to take care of our finances.
As a parent, you may want your kids to grow up with a better handle on money than you had. The key to this is to take away the mystery about money. Having frank and honest discussions with your kids will turn money from a taboo into something they think about automatically as part of their daily lives.
Here are some ideas on how to get started.
1. Show Them What Money Can Buy
Little kids have no concept of money. Mom and Dad go to the store and get the things they need – there’s not much more to it than that. But as they get older, you can start to bring them into the discussion about what you can and can’t afford. By showing them how much money you have to spend, and talking to them about the choices you have to make based on your budget, you can help your kids learn that money is a finite resource that has to be managed carefully.
A great place to start is in the grocery store. Younger children will enjoy reading the numbers on the price tags and helping you identify the price of each item. For older kids with some math skills, take cash with you and have them help you stay within your budget. Unlike a credit card that always just seems to work (even if you don’t actually have the money), cash is limited to what’s in your wallet. If you bring a little less money than you usually spend, they’ll have to make some tough decisions.
The benefit of this exercise is that kids will learn how to make spending choices in a safe environment. You can let them feel the consequences of a bad decision, and you can talk to them about how to make smarter choices if they go wrong. Learning these things now will help them avoid those mistakes when they’re out on their own for the first time.
To further the conversation, talk to your kids about how much you pay for the things in your life and what you get out of it: “This tank of gas cost $50, and it’s enough to drive everywhere we want to go for a week," or, “It costs us $15 a month for Netflix, and it lets us watch as many movies and TV shows as we want." These discussions help kids see the relative value of the different things in their life, so they can learn to make choices about how they want to spend their money.
2. Teach Them How Money is Earned
“Kids today don’t know the value of a dollar," I’ll say when I’m a grumpy old man.
It’s great to show kids what you can buy with your money. It’s equally important to teach them what it takes to earn that money.
There are two ways to go about this. The first is to talk to your kids about how your family makes money. Tell them (or better yet, show them) what you do for a living. Go over details, like how many hours a week you work, what kind of tasks you do, and how much money you make. Older kids can handle some information about the ancillary costs of a job, too. The money you spend on your commute and the time you spend getting ready for work are among the sacrifices you make for your job.
The second way to show your kids how money is earned is to put them to work. Little kids can do simple chores like putting their laundry in the hamper or setting the table before dinner to earn an allowance. Older kids can do more advanced chores around the house. And teenagers should be encouraged to get part-time jobs. As in the real world, no money is paid for work that is not done.
Kids learn better long-term habits when their allowance is paid in larger sums at regular intervals, rather than on a constant drip. Rather than handing your kid a dollar every time they take out the garbage, keep a running tally of what they’ve earned and pay them every two weeks. This will help them learn delayed gratification. And if they spend it all right away, the wait for their next payday will be a real-world lesson.
If you’re feeling really sadistic and want to teach them the raw, unfiltered truth about what it’s like to earn a paycheque, deduct taxes.
3. Help Your Kids Save and Spend Their Money
The best way to learn new skills is through practice, which is why I advise you to help your kids use the money they earn.
This should ideally start with an age-appropriate discussion about what their money is for. A specific goal can give kids a target to save for. Kids can also be taught how to save for a rainy day and (of course) some impulse spending. Talk through the things they want and discuss the trade-offs they’ll have to make. For example, they’ll be able to save up for a big-ticket item faster if they save more of their money, but that means they’ll have less to spend in the meantime. For older kids, you can help them make a rudimentary budget based on their expected income and their goals.
Help kids open a high-interest savings account with the money they save. Go through the process with them together: Compare different options, look at interest rates, and open an account online. Make sure to look beyond the bank you use most. There’s a lot to be gained by shopping around for financial products, and kids who inherit their parents’ bank may not get the best deals.
There are other savings tools you can discuss with them as well. Teenagers who earn employment income will be able to open a registered retirement savings plan (RRSP) and start saving for retirement if they so choose. Tax-free savings accounts (TFSAs) are only available to those who have reached the age of majority in their province.
Teenagers, especially those who are getting their first job, should also open their first chequing account.
4. Involve Teenagers in the Household Budget
As your children grow into teenagers, your focus shifts to preparing them for the “real world." An important part of that is to show them how to manage all of a household budget, and the best example is your own. Teenagers are better prepared to juggle all of their expenses when they are exposed to these realities early.
Invite your teenagers to discuss the household budget with you. Show them all of your income and expenses so they have a chance to see what it takes to run a household. Discuss what’s optional (things like entertainment and luxuries) and what’s not (housing and utilities). Talk to them about how you make spending and saving decisions based on a budget. For example, you might choose not to use air conditioning in the summer because of the price of hydro. Or, you might drive a used car to save money on your monthly payment.
5. Start the Conversation
No matter how old your kids are, it’s never too early or too late to start the discussion. Young children enjoy learning how to identify numbers and how to count. As they go through school, kids will (hopefully) be excited to apply their newly learned math skills to the real world. Teenagers will appreciate the trust and respect you give them by involving them in financial discussions.
By the time your kids are grown up, they’ll have the knowledge and skills they need for the real world when you have these conversations.