Considering the importance of budgeting and saving for the future, it’s a surprise that schools aren’t more active in teaching the fundamentals of personal finance.
That means the importance of children being taught money lessons at home can't be overstated.
Even if you weren’t taught money lessons growing up, it’s not too late to begin with your own children. Although every family will tackle this challenge in their own unique way, there are a few universal lessons that are useful for all children to learn.
To set your kids up for success, here are some things to keep in mind...
How Does Money Work?
Although our society thrives on using credit cards, plastic, and even cryptocurrency – it’s still important for kids to know what cash and coins actually look like. Even if you barely use cash, consider getting some out of your bank account in small bills and coins to teach your kids how much each one is worth.
If your kids are preschool age, play “store” with them in your kitchen and tag items in your pantry with a price tag. Give them a few dollars and ask them what they would like to buy. When they checkout, tell them how much they have leftover, or how much more money they need.
If your kids are in elementary school, ask them to help you make a grocery list.
Look through store flyers together to see what’s on sale and clip applicable coupons for things on your list. At the store, ask them to help you pick out what’s on the list. Teach them the value of buying in bulk, especially when items are on sale. Then when checking out, ask them to count out the money to give to the clerk.
For everyone’s sanity, try going when it’s not a busy time.
Another way to get your kids involved with handling money in a creative way is through board games. Consider playing Monopoly, The Game Of Life or Payday with your pre-teens and teenagers to help walk them through budgeting, investing and spending in a fun and risk-free setting.
A study done by Capital One Financial Corporation found that the more frequently kids spoke with their parents about money, the more capable they felt managing money. That means beyond just fun and quality time, board games offer parents another opportunity to speak to kids about finances.
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How Do You Earn Money?
Once kids understand how money is transacted and what it can be used for, the next lesson should be in where money comes from.
Even if you believed it grew on trees as a child, this is something you want your kids to be clear on. Money is something that comes with hard work.
Sure, it can also be gifted, and at a young age it often is by family members, but the most common source of money is earned through work.
Allowance Vs. Commissions
There are generally two schools of thought on giving children allowance.
Some parents give their children a set amount of money unconditionally on a consistent basis. Children receive this money for simply being part of the household and not necessarily for completing certain chores.
Other parents give children the opportunity to earn their allowance, thereby rendering the money as commissions. That means they can earn money only by completing a set list of chores.
There are pros and cons to both of these approaches.
A pro of giving money unconditionally on a consistent basis is that it allows kids to receive money regularly and give them practice in managing it. The con of this approach is that in a study entitled “Improving Financial Literacy: What Schools and Parents Can and Cannot Do,” it was found that children who received an unconditional allowance had the lowest rates of financial literacy as well as a poorer work ethic.
On the other hand, paying out commissions is beneficial as it teaches children the direct correlation between doing chores and receiving money for those efforts. The con of this approach is that children are taught to expect money for doing any work around the house, including chores they really should do regardless of whether they are paid or not. Additionally, some children are not motivated by money and would rather be penniless than have to do chores.
If the above approaches seem to work well for your children with no negative consequences, then stick with it. However, if you are looking for a more blended and perhaps more balanced approach, try a mix of the two.
Give your children a list of chores that are expected of them without pay.
This could be making their beds, clearing the dinner table, doing laundry, or helping with the dishes. Ensure the chores are age appropriate and teach them how to do each task initially. These are good lessons for them as they grow into young adults. When they are off on their own, no one will pay them to tidy up after themselves, thus it is best to learn these habits early on.
However, you can also set aside extra chores that may go beyond the scope of everyday work to pay them for.
This could be seasonal work, such as helping out with landscaping or shoveling snow. Or it could be regular, but more undesirable tasks such as cleaning bathrooms or mopping floors. If your child is keen to earn extra money, you could find additional tasks for them to do. Use your discretion in how much and what tasks you would like to pay them for.
As children get older, they may be interested in other sources of income besides allowance or commissions. Although kids should not be expected to work full-time, there is value in having a part-time job.
If they’re interested in caring for other children, you can encourage them to take a babysitting course to get first aid and child care knowledge. Of course, ensure your child is mature and responsible enough to pursue this as a part-time job.
A study from the University of British Columbia which analyzed the data of 250,000 youth until they were adults found that teenagers who worked during the school year reaped many benefits. For instance, they were more likely to find jobs that were suited for them, develop better networks and make more money in their 20s than teens who didn’t work.
If your teenager only works during times off school such as the summer, consider this: teens who worked during the school year generally earned higher incomes in future years than teens who only worked during summers.
The former set of teens learned how to juggle the demands of both school and a job. Balancing school with a part-time job teaches teens important life skills, which can later be applied to the demands of balancing work and family.
Non-working teens will eventually learn this when thrown into the workforce as an adult, but learning it early can give your child an edge in their career ambitions as the study has shown.
Where Should The Money Go?
Once your kids have their own money, it is important for them to learn how to manage it.
The key to managing money is to learn how not to spend it all!
Many adults have trouble with this concept, and it only gets harder to break bad habits with age, thus learning good money habits at a young age is an investment for their future.
Whether money is given or earned, children should be taught how to allocate their cash wisely.
Instead of a conventional piggy bank, consider getting your child three clear jars.
Label them as save, spend and give.
Encourage your child to put a minimum of:
- 20% into savings,
- another 10% into sharing, and
- then the remaining 70% into spending.
But more importantly, before talking about numbers, talk to your child about the value and importance of each jar.
For instance, when it comes to saving, talk to them about saving for a rainy day and how to achieve long-term money goals.
The younger they are, the more visual you may have to get. Have your child cut out pictures of things they would like, whether it’s a new toy or experience out (such as going to an amusement park). Help them develop a financial plan to reach this goal.
You can teach them that allocating more to savings, then the immediate spending jar will help them achieve their goals faster.
Teaching your children to share and give of their resources is an invaluable lesson as well.
Help them choose a charity, church or organization that is near and dear to their heart to give to. If they are at a loss of who or what organization to give to, use this teachable moment to volunteer with them at various local organizations that need help.
You could also research organizations online to find international causes that speak to your child’s heart. This is a good lesson in helping your child see that money not only buys things, but helps people too.
It is never too early to speak to your child about investing.
Related: The Year You Start Investing
Give them some examples with real numbers.
For example, you could use a compound interest calculator to show your child how even investing a small amount of money can result in a much larger amount when they are adults. The key is to show them the difference between a person who starts early and a person who has fewer years to invest.
Get them involved by helping them choose a few individual stocks to put some of their hard earned dollars in. It could even be a toy or a tech company they know about. Then keep up with the stocks by reading the news together to show your child how stocks fluctuate, and what external factors could be causing those gains and losses.
Keeping your child interested in investing is key.
Once your child is earning income with a part-time job and has filed an income tax return with the CRA, you could encourage them to open a TFSA (better when income is low) or RRSP account to tax shelter their investments. By contributing a small amount at a young age, this can set them up for financial stability later due to the power of compound interest.
Leading By Example
In addition to instructing your children, the best lessons are often taught through your actions. Having them see you handle and manage the family finances is invaluable.
Although it may have been taboo to talk about money, let alone involve you in family finances when you were a child, involving your children in the process is the first step to increasing financial literacy.
However, the biggest key to increasing financial literacy, and not raising ignorant children is to be a positive example.
If all your child sees is their parents shelling out their credit card for every purchase, they may think money is infinite and ever-flowing. Show them your budget and the finite amount of funds you have to work with each month for groceries.
Although some parents refuse to talk to their kids about money in order to avoid worrying them, this need not be the case.
Confidently showing your child that you have control over the finances and you know where every dollar goes due to a sound budget can give them reassurance.
Talk to your child about what you do to earn money and what happens if you don’t work. Having savings for financial setbacks such as job loss provides security for your family. These real world examples give your children an idea of the importance of saving and having a plan.
Having these money discussions early on will set your children up to be financially literate adults and bring the family closer together in the process.
What Are Your Money Tips for Kids?
Many of you have likely raised, or are raising, your own kids. What tips do you have to share with the rest of us about raising financially responsible children?