May 31, 2017 / Published 11:25 AM EST / Rob Mann, Staff Writer
How to have ‘the talk’ (no, not that one!) with your kids
Ok parents. At some point, you’ll need to have the talk with your kids. It’s going to be a bit awkward, and they may not be very receptive when you bring it up. But there will come a day, and trust us when we say this: at some point, your kids do thank you for teaching them about money.
You didn’t think we were talking about something else, did you?
Money isn’t always easy to discuss with your children. They may not really grasp the concept of work and income, let alone allowance and savings, so they could have a hard time wrapping their head around it. That’s why it’s important to break things down so they can understand the concepts you’re talking about, and introduce them to more advanced or complex ideas as they grow older. And if you don’t want to teach them about money at an early age because you want them to focus on just being a kid, that’s totally reasonable. But we wouldn’t be encouraging this if it wasn’t so important.
To some families, the long-term goal of having the talk is to equip their kids to manage their own finances through life, and for others it may be preparing their children for a healthy inheritance or wealth transfer.
For those passing significant wealth onto their children or grandkids, listen up: 70% of wealthy families lose their fortune by the 2nd generation, and 90% lose their wealth by the 3rd generation. And of those families, 64% admitted that they had disclosed little-to-nothing about their wealth to their kids, with 78% saying they plainly didn’t trust that their children to handle significant wealth. Do the kids burn through their inheritance because of so-called “affluenza syndrome”, where they lack a work ethic or understanding of the value of a dollar? Or is it because they were never taught how to manage money in the first place?
If you aren’t wildly wealthy, talking to your kids is possibly even more important, as they aren’t given a financial head-start via inheritance, so to speak.
Still not convinced you really need to talk to your kids about money? It was recently found that 44% of Canadians learned little or nothing about managing money from their parents, and those same people are more likely to miss monthly payments than those whose parents taught them about finances. So teaching your kids will help them with their day-to-day finances, all throughout life.
If you’ve read this far, it’s safe to assume that you’re onboard with the idea of talking about money with your kids. And to help you do that, here are 9 financial topics to discuss with your children, and an appropriate time to teach them about each topic.
• How to earn money (age 4-8): Where money comes from is a great place to start when teaching your children about finance. Tell them how you and/or your partner make money, and what you spend money on; your home, groceries, activities, transportation, etc. Of course, you don’t need to go into fine detail about your earnings or spending habits, but talking about work is a great opportunity to introduce your kids to chores in exchange for an allowance, teaching them the value of earning money.
• Creating a simple budget (ages 6-10): Once your kids have a grasp on the concept of earning money, show them how to build a budget for using their hard-earned cash. When I was around 5 or 6, my dad used the jar system to teach me about budgeting. I had a spending jar, a savings jar, and a just-in-case jar, and each week when I’d finish my chores (clean my room, tidy the garage, and help mum weed the garden), he’d help me split my money up through the jars. Six bucks for spending, two for saving, and two for just-in-case. While I now use banks and investing instead of jars, it was a lesson that’s stuck with me all along.
• Planning and saving for a big goal (age 8-12): If your kid has their eyes on a new toy, video game, or even a novelty-sized giant gummy bear, you can teach them how to save up for a big goal. The jar system can be super helpful here, where your kid can set a target what they need to save for the goal, and write it down on the jar. While introducing them to the idea of working towards what they perceive as a significant goal, be sure to mention that as they get older, they can use the same principle when they want to buy a car, go camping with their friends, or save up for post-secondary.
• Mistakes you’ve made (age 10-14): As you may have already noticed, as kids hit their teen years, they have a slight tendency to think you just don’t understand them. But that’s a great opportunity to tell them about some financial mistakes you made, and how you fixed or learned from those mistakes. You may not feel comfortable opening up and making yourself a bit vulnerable, but you’ll help them by providing real-life examples of how things can go wrong, and what they can do to avoid those situations.
• Borrowing and credit (age 12-16): Debt is something that, as adults, we’ve learned to live with. But think back to your 18-year-old self, getting your first credit card. It felt like free money, right? Now think back to your first credit card bill. That free money quickly became anything but free. Teach your kids about how borrowing money works, how or when to use credit, and the importance of building and maintaining a good credit score.
• Interest (age 12-16): Albert Einstein once called compound interest the 8th wonder of the world, and that concept stands true today. Interest can help grow the balance of your child’s savings account, but as they grow, they’ll find out how interest can also impact the balance on their credit card. Of course, teach your children about the world of good debt with things like mortgages or student loans, but also about how interest can cause a world of distress if they aren’t responsible with their finances.
• Shopping around (age 14-18): By now, your kids understand how to earn, save, and budget their money – and that’s awesome! The next thing to do is to teach them the value of shopping around. Take them to the grocery store, pick 5 different items, and mark down the prices. Then, head over to that grocery store’s bitter rival, and compare the prices of those items. Some will be the same, some more expensive, and some cheaper. If you’re more of an online shopper, compare prices from different online retailers or with an app like Flipp. Not only will it show your kids how they can save money by comparing prices, but it can also help them be less of an impulse-shopper.
• Sharing (from day 1 until forever): You’ve likely already taught your kids about sharing their toys or games, but that lesson definitely needs to extend to sharing money. If you support any charities, teach them about how charities work and why they’re important in helping those who are less fortunate in your community or around the world.
• How investing works (age 16-20): This is definitely a more advanced topic, and to be honest, investing is a new concept for many adults and parents as much as it is for their children. If you’re in that boat, don’t worry. There’s something just as invaluable about learning with your kids as there is in teaching them directly. You can start with the basics of not putting all their eggs into one basket, and introduce the idea of investing in something basic and secure, like GICs or bonds. You can even use some of the money from your child’s savings jar to help them actually invest.
In addition to GICs and bonds, you can teach your kids how stocks work, where buying shares of a company can go up in value as the company grows, but also how that same stock can lose value if the company starts to flounder. From there, your children can learn about other investment assets like mutual funds and ETFs, which bundle together a variety of stocks or bonds for investors.
Like we said, this may not be an easy thing to talk to your kids about, but it will absolutely help them (and maybe even yourself) in the long run. Not only will it enable your kids to manage their money when they get their first job or move away for post-secondary, it’ll also help them pay off student loans, build a down payment for a house, and plan for retirement. The lessons you teach them today (and throughout their childhood) will last a lifetime, and you’ll help them live a better life.
Not sure where to begin? If you have questions on any of these topics or want to learn more about managing your finances and preparing for the future, get in touch with a Manulife advisor today.