CMFMAG TeamBy Liz Summers CFP FMA FCSI
From the time children are born, everything that they experience is influenced by their parents and/or guardians – from their level of physical activity, to their interactions with others, to how they choose to spend their free time. Therefore, it shouldn’t be shocking that this even extends to how children view and understand financial responsibilities. That said, there are still a lot of parents who don’t properly help their children understand money and the role that it will play during their lives. By neglecting this educational opportunity many people are setting their children up to experience growing pains when they are eventually, fiscally independent.
What can happen if children grow-up ignorant of financial concepts? Well, the best case scenario is that they muddle through and figure it out themselves. The worst case scenario could be that your children spend more than they earn, don’t pay their bills on time, declare bankruptcy, and perhaps jeopardize relationships and/or career prospects. This doesn’t have to be the case. Starting to talk to your kids about money at an early age allows you to provide your children with money skills that should enable them to grow into financially responsible adults. Furthermore, by starting young your child will be more apt to listen to you and take your advice versus when your child is in their teen years.
Allow Your Children to be Financially Responsible
Typically, when your child starts to express a genuine interest in material matters, otherwise known as the case of “I wants”, it is a good time to start giving your children an allowance. This is usually between the ages of 3 to 5. A weekly allowance is a good way to teach your children to be money smart. When your children are younger, it is ideal to provide them with coins instead of bills. That way, they will have money to put aside, money to spend and money to donate.
For example, if you decided to give your four-year old child one dollar a week for allowance, you could provide four quarters instead of one loonie. Encourage your child to set some money aside for saving, some to spend and donate the rest to charity. Although it may not be a large sum of money, encouraging your children to have a balanced view of managing their finances as early as possible has many benefits because it becomes habit forming. When your children are older and their allowance goes up, so too should their responsibility for their spending habits; therefore, if you expect them to be responsible for buying their own clothes, lunches, and tickets for movies or concerts the allowance you provide needs to be high enough to cover these costs. By providing your children with a realistic allowance, they will learn quickly that if they spend all of their money at the beginning of the week, they will have nothing left to spend on the weekend. As a family, determine how much is reasonable for an allowance, keeping in mind what the child will be financially responsible for.
When deciding to give an allowance, be careful of tying it to daily chores. Instead, offer the opportunity to make extra money by shoveling the drive-way, mowing the lawn, or cleaning the gutters and leave the daily chores as not optional. This will help to ensure that your child learns what it means to contribute to the household and can’t opt out.
Today’s Children are Tomorrow’s Investors
Children are never too young to learn about the difference between “needs” and “wants.” A simple budget can help your children create a snapshot of how they are managing their money. While it is tempting to buy the latest fashion or expensive toys, it is important to be a smart shopper. Buying items on sale and comparison-shopping will help keep their expenses down.
Reinforce to your children that regardless of whether they are an adult or a child, it is always important to consider “needs” versus “wants” when shopping.
Encourage your children to establish financial goals and objectives. For children, short-term goals could represent saving for a bike, a video game or a computer. Generally, it takes less than a year to reach these goals, and usually less money. Teenagers may have long-term goals that require careful planning and they are usually more expensive, for example, a college education, a car or even starting a new business.
Most young people today have part-time jobs whether it is babysitting, working in a store, camp counselor, or doing odd jobs for people in their neighbourhood. Encourage your children to save a portion of their income towards their goals.
Advisors recommend a “pay yourself first” strategy. Each time your child earns money, receives an allowance, or receives a birthday or holiday surprise; have them set aside 10% into a separate savings plan.
Lead by Example
Children are more likely to be financially savvy if they see their parents saving regularly. While the goals and objectives of an adult will be different than those of children and teenagers, the important thing is that they see how gratifying it can be to reach a financial goal. Discuss your goals with the entire family, your progress in reaching these goals and your successes when you do so. While it is important for children to see you work hard, it is equally important for them to see you succeed.
A useful exercise to teach your older children the value of money would be to share the details of your pay-cheque by showing them firsthand how it is spent. Show them how much goes towards taxes, bills, groceries, and family expenses. It is also important to explain to your children the consequences of not paying bills on time as well as the proper use of credit. As children begin to understand how you spend your money, they will appreciate the cost of household expenses and also be less likely to take money for granted.
It is also important for you and your children not to neglect volunteer or charity work. On top of financial contributions to the charitable organizations that you support, volunteering your services should also be considered a worthwhile contribution. While each of us have our own set of personal and financial goals, it is equally important to think about others in the community. Teaching your children to be socially conscious at a young age will contribute to a lifetime habit and strengthen your children’s ability to think about others and offer support. These experiences may also be important when applying for college or university entrance, and for job applications.
Teaching your children to be financially fit is a wonderful gift that will enrich their lives and livelihood. By trusting them to be financially responsible when less is at stake, you allow them to fall down, learn from their mistakes, and build themselves back up. You can be confident that as they enter adulthood they will have a solid financial foundation to build on, and know that they have the skills to pay the bills.
This article was prepared by TD Mutual Funds for Liz Summers, who is a Financial Planner with TD Waterhouse Financial Planning, a division of TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion Bank. The information contained herein has been provided by TD Waterhouse Financial Planning and is for information purposes only. The information has been drawn from sources believed to be reliable. Where such statements are based in whole or in part on information provided by third parties, they are not guaranteed to be accurate or complete. The information does not provide financial, legal, tax or investment advice. Particular investment or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance. TD Waterhouse Financial Planning, The Toronto-Dominion Bank and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered. TD Waterhouse Canada Inc. – Member Canadian Investor Protection Fund. TD Waterhouse is a trade-mark of The Toronto-Dominion Bank, used under license.
