Raising money-smart kids starts with developing healthy financial habits and then modeling them for your kids. Here are simple guidelines to help keep a family’s affairs in order. They can also open the door to discussions about money with children or teenagers.
1. Know where you stand financially
Figure out your net worth; everything you and your partner own less everything you owe.
2. Live within your means
Arguably, the most important lesson you can teach your kids is to spend less than you make and save the difference.
3. Save/Pay yourself first
Take a set amount of money each month and have it automatically transferred from your pay cheque into a separate savings account.
4. Understand the difference between good debt and bad debt
When used responsibly, credit can be a wonderful tool. Building a good credit history enables you to make big purchases, such as a car or house, at a reasonable interest rate. Incurring debt for the purpose of buying an asset – something that adds to your net worth and has the potential to go up in value, such as a house—is an example of good debt. The flip-side is bad debt. Examples include borrowing to buy consumption goods with little resale value, such as furniture and appliances, TVs and clothes. It is always best to save for these types of purchases.
5. Set up a financial safety net
Every family should be prepared for a financial emergency. A good rule of thumb is to have three to six months of living expenses saved in cash reserves.
6. Know the difference between needs and wants
Help your kids understand the difference between needs and wants by asking them the following question: “Do you really need this, or would it just be nice to have? Would you spend your own money on it?”
7. Teach delayed gratification and set financial goals
Strong will-power and impulse control are important life skills that will help you manage your money effectively.
8. Track your spending
Keeping close track of how you spend your money can be a great reality check.
9. Save now for your children’s education
Take full advantage of tax-assisted programs offered by the government to help save for your children’s post-secondary education. The government created the Registered Education Savings Plan (RESP) for exactly this purpose.
10. Present a united money front
Parents should endeavor to present a united front when it comes to financial behaviour.
If children or teenagers sense an opportunity to get what they want by exploiting the fact that their parents are not on the same page, they will take full advantage.
The CICA (Canadian Institute of Chartered Accountants) guide helps to remove the guess work involved in teaching money matters in the home. It is available in e-book and hard copy formats and can be obtained by visiting www.castore.ca/moneysmartkids.
Tips to help your child become financially literate
Ages 3-5: Start talking about money and showing them how much things cost. Have them start making choices about buying small items.
Ages 6-7: Introduce an allowance. Give them money every week and help them to start setting short-term goals.
Ages 8-10: Take a trip to the bank and help them open up a chequing account. Explain the power of interest and saving for the future. Think about setting up a savings matching plan to help them achieve their goals quicker.
Ages 11-14: Help them find paying odd jobs outside the home. Help them set long-range goals. Explain taxes and the law of supply and demand. Incorporate the media into their lessons, such as newspapers, magazines, Internet and TV.
Ages 15-18: Help teens develop more independence. Support their savings strategies with their jobs. Teach economic lessons. Help them assess job opportunities, standards of living and major life purchases. Show them financial planning software.
Written by Canadian Institute of Chartered Accountants
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