Lessons in Financial Literacy: What to Teach Your Child About Money

From basic habits at a young age to learning about taxes and credit before starting their post-secondary education, the lessons parents teach their children can significantly impact their financial future. These skills will introduce them to financial education and give them a practical money mindset that will help them grow into money-savvy adults.

Understanding money basics

Starting your kids with the basics is crucial for financial literacy. Fortunately, the concepts are easy to understand at any age.

The best place to start is with the concept of money and transactions. You can teach your kids the different values of each coin. Additionally, you’ll want to let them know that a $2 coin is commonly known as a “toonie,” while $1 coins are typically called “loonies.” With these coins, you can explain to your children that the money can be used to buy things such as fruit, toys, gas, etc. You’ll also want them to understand that different things cost different amounts of money.

The value of earning and saving is also significant. This is an easy lesson to teach as you can give your kids an allowance for doing small chores such as cleaning their room or doing their homework. Once you give them their money for completed tasks, you can also talk about how saving a portion for the future is important.

Using real money and monitoring chores allows your kids to learn the value of money in a practical setting.

Money management skills

With a money basics foundation set, it’s easy to move on to practical money management skills.

Start with the allowance that your kids are already getting from chores. You want to reinforce the idea that money is earned through work. It’s similar to how adults have jobs. Instead of giving them the same amount for each task, assign different values so they understand that more significant or difficult jobs pay more.

With all that hard-earned money, encouraging them to put it all in a piggy bank is a good start, but there may be better practical solutions. Instead, introduce them to a jar or envelope system where their money is broken down into the following:

• Savings jar: 50%
• Spending jar: 40%
• Donating jar: 10%

Having these jars allows your kids to learn about spending, saving, and donating. Savings is one of the fundamental concepts of personal finance, so having them learn about delayed gratification early can be highly rewarding.

If you want to make things more formal, you could open a youth savings account for them so they can deposit their savings at the bank. Also, as your kids get older, you’ll want to introduce them to budgeting and banking apps so they can track their progress. Even a simple app that lets them compare prices can go a long way in their financial journey.

Developing healthy money habits

Healthy money habits are essential since they’re lessons that will carry on for their entire lives. The good news is that these lessons are an extension of what you’ve likely already taught them.

Regarding savings, discuss short-term and long-term goals to show the importance of planning for the future. For younger children, a long-term goal might be something simple, such as buying a toy or game. As your kids get older, they may be interested in more expensive things such as electronics, which requires saving even more.

Additionally, it’s worth talking about the importance of saving for their post-secondary education. Even if you already have a registered education savings plan (RESP) set up for them, you still want your kids to understand that college and university tuition is expensive, so they should save for it.

Another money habit to discuss is how credit and debt work. With credit, you’re borrowing money that has to be paid back. On the other hand, debit withdraws directly from your bank account. While having a credit card is important to help you build your credit score, they can only get you into debt if they’re not used properly. It is vital to explain to your kids how interest accrues and how unpaid balances can cost them a lot if they’re not careful.

To help your kids get familiar with credit, you could get them a joint credit card where you’re the primary cardholder. This will allow you to oversee their transactions to ensure they’re not overspending. You could then show them the monthly bill and review all the details. You could also teach them some basic fraud protection skills, such as checking all transactions and making sure their PIN is unique.

Preparing for the future

As your kids enter their teenage years, you must prepare them for the future so they can be financially independent. Establishing financial goals is easy, but sticking to them is always the hard part. That’s why using the specific, measurable, achievable, relevant, and time-bound (SMART) method can be highly effective.

For example, say your child wants to go on a vacation with friends before starting their post-secondary education. Their SMART goal might look something like this:

• Specific: I want to save $2,000.
• Measurable: Track savings through online banking apps
• Achievable: Set aside $100 a month from allowance and jobs.
• Relevant: Lines up with common goals of friends
• Time-bound: I want to save this amount within two years

One final topic worth discussing with your children before they start college or university is income taxes. Even though filing your taxes is straightforward, many people stress out about it. The easiest way to discuss the subject with your child is to do your taxes with them. If they already have a part-time job, you could have them file their own taxes.

Filing income taxes is easy since everything can be done online, and you’re often just inputting info found on your tax slips. That said, it’s worth talking to your kids about how income tax brackets work in Canada and what their tax dollars pay for.

Final thoughts

By regularly teaching your child about money, you can lay a foundation for future financial responsibility and independence. That said, everyone will have different views on money, so they may not mirror your decisions. Guiding them is a good start, but sometimes your kids must make mistakes to learn. The hope is that the advice you’ve given them will minimize the financial cost of any mistakes.