Practical tips for teaching financial responsibility.
Do you ever wish you could go back in time and give your eight-year-old self a few pointers on how to better handle money? Many adults view money management as a necessary – but unpleasant – part of life. But it doesn’t have to be that way for the next generation.
If you teach your kids about financial literacy at an early age, they can grow up to be confident and capable when it comes to money. Before a certain age, perhaps the teenage years, most information about money and finances may seem too abstract or complicated. With younger children, it’s often better to start with more basic concepts until they can comprehend the idea of saving and investing.
There are many opportunities in everyday life where your kids can learn valuable lessons about money. Here are a few examples:
- Give them a big-picture view of money as you manage your own budget. Explain budgeting basics and how you allocate money to different needs and wants (e.g., food, clothing, housing, entertainment, transportation). Then explain how most adults work to earn enough money to meet their needs and, hopefully, to satisfy their wants. Any money left over should then go towards savings.
- Talk to kids about what things cost in terms they’ll relate to, as many likely won’t understand the numbers. For instance, you could say that a new car might cost a few years’ worth of food for the whole family. The goal is to help them appreciate that you can’t always afford to buy a new car or the latest electronics.
- When you go grocery shopping, show the kids how to set a food budget and how you make choices so you can stick to this budget. If they go over budget, either they need to put something back or redirect money from another part of the overall family budget. This may involve making sacrifices.
- Use their allowance and other sources of income (e.g., money gifted on birthdays) as a teaching tool. Explain how they can spend a certain amount on things they want, but should put away the rest for things they’ll need later on. This will likely be their first attempt at managing money and making financial decisions, so be ready to guide them if they have questions or start going off track.
- Similar to the point above, consider paying kids a token amount of money for chores that fall beyond their regular routine. This will give them a greater appreciation of earning money for themselves, plus they may be less prone to squandering the money when they recognize the hard work required to earn it.
- As your kids get older, explain the basics of how credit cards, debit cards and bank accounts work, so they start making a stronger connection between spending and saving. You can teach them the risks of overspending and going into debt, compared to the benefits of saving money and “investing” in bank accounts to earn more. Kids tend to enjoy watching their money grow, and opening a savings account for their money is an activity – and a responsibility – they’ll appreciate later on.
One recurring theme in the examples above is that people can’t always get what they want. Kids need to understand that financial responsibility is all about making smart spending and saving decisions with the money they have.
Of course, if you lead by example and show them the right way to save and spend, they can develop a healthy relationship with their own money. If you work with a financial advisor, you can also discuss the concept of professional financial help for your longer-term money matters. To put the notion in terms kids can grasp, try comparing your financial advisor to a doctor who looks after your health or a mechanic who fixes your car. Your financial advisor is simply someone who helps you maintain your financial health!
When it comes to teaching your kids about money, remember that it’s a gradual process and you shouldn’t overwhelm them with information. As they get older, introduce them to more complex concepts and give them more practical tasks to develop their money management skills.
To learn more about how a financial advisor can help you to save and invest, visit AGF.com/ValueOfAdvice.
The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.