With schools back in session, it’s a good time to consider how we can help kids acquire the money smarts needed for life success.
Schools may provide some form of financial literacy, but parents can play the most influential role in this area.
That’s because unlike teachers, parents can draw on many real-life opportunities to help their children gain foundational financial skills.
So, for all the parents out there, here are my tips for raising money-smart kids:
Introduce children to budgeting basics
Once children reach an appropriate age, help them understand the role of budgeting in responsible money management.
Depending on the child’s age, give them the opportunity to earn some “income” (e.g. from delivering newspapers or an allowance for performing house chores).
Ask your child to create a budget detailing how they’ll spend this money, allocating funds for things such as their daily spending allowance, snacks, entertainment, savings and donations to a favourite charity.
Give your children some freedom to make the decisions on how to assign and spend the money, but ask them to keep a journal of their expenses.
Go over the journal with your child at the end of the month, using this opportunity to discuss what they learned and any areas where they can do better.
Spark a savings habit early in life
When it comes to teaching your child the value of savings, the best approach is to get them started on saving towards a personal financial goal.
For example, your child may be interested in a new video game or they may want to make a trip overseas with their school drama club.
Once they’ve established a realistic goal, let your child decide how much they would like to set aside regularly in savings, either from their personal allowance or other sources of income such as babysitting.
Open a dedicated savings account for your child and cheer them on as they work towards achieving their target. Celebrate with them when they achieve their goal – this personal accomplishment will serve as strong motivation for a lifetime of savings.
Teach your kids money does grow – albeit not on trees
Maybe you told your kids money does not grow on trees, but they also need to understand that money saved can grow significantly through the principle of compound interest (interest earning interest).
Parents can teach this without getting into complex calculations.
Ask your child how they’d fill a city block with corn crops, starting with only three grains of corn.
If they say that’s impossible, explain how the first plant will produce several grains that they can replant. If they keep replanting each harvest, the entire block would soon be covered with corn crops.
Explain how the same principle applies with your child’s RESP (you can show the statements to your child and explain it very simply).
Or, even better, invest in a multi-year term-deposit to be used in purchasing something your child desires and track the growth in value over time.
Show them how money protects valuables
The final money basic you want to teach your school-aged child is insurance.
Given that driving around in the family car is such an everyday practice, parents can use their auto insurance policy to introduce this concept.
Define insurance to children simply as a way to use money to protect and replace valuables.
Review your car insurance policy with your child and teach them the meaning of key terms such premiums, deductibles and coverage.
Explain how this applies to other types of insurance, such as on your home or contributions to the Medical Services Plan for health care.
The more practical you can make your lesson, the better.
Educating your child about money has to be a continuing process but by focusing on these four areas, you can sow the seeds long-term financial well-being and future prosperity.
Kathy McGarrigle is Chief Operating Officer for Coast Capital Savings (wwwcoastcapitalsavings.com), Canada’s second largest credit union by membership.