How to talk to your kids about money, budgeting, and saving – A guide for parents
One of the earliest times your kids learn about money is by sitting in the grocery cart. They watch you evaluate products and pay with a credit card or cash. Sure, they may end up whining on the floor about not getting a Kinder Surprise at the checkout counter but don’t give in. A teaching moment to talk to your kids about money is upon you.
As parents, we’ll be the major influence on our children’s spending habits and feelings towards money. We need to get comfortable talking about money and the earlier we start, the better the outcome. Here’s an outline about how to talk to your kids about money as they grow up.
Age 5 and under: Start early.
Introducing your kids early to money allows them to grow up with it as part of their daily lives. Teachable moments create themselves the more they interact with the idea of money.
My two-year-old daughter uses an old glasses case as a wallet and likes to push buttons at the ATM. The other day she handed me a toy from a low hanging bin at the corner store and told me to, "buy it." This is her current level of understanding. A wallet carries money, money comes from a machine, and if she wants to buy something, she needs money.
My five-year-old son has a piggy bank he loads with the spare change he finds in couch cushions. He brings home his Scholastic books flyer, and we'll dump out the coins and see what he can buy. We count up the pennies, explain to him how it turns into a nickel, how 5 nickels convert to a quarter before getting into loonies and toonies. He's learning that things cost money and if you don’t have enough money, you can’t buy it.
We find little moments to talk about money in a way he can understand. At the grocery store, we allow him to spend $10 on school snacks. We remind him what he likes, show him what's on sale, and let him make the decisions so he feels empowered. At home, we tell him to shut the water off during bath time because water costs money - introducing the idea of household expenses but, in a context he can grasp.
Find moments in your day to day where you use money and enlighten them. Don’t overwhelm them, practice a little bit at a time.
Age 10 and under: Be age appropriate
Don’t expect a kid in grade school to grasp the idea of prime rates or the importance of diversifying their investments. Use real-world situations, at age-appropriate times, to talk to them about money.
I have a friend whose son, at only 7-years-old, bought an iPad. Here’s how it happened. At age six, he started receiving an allowance which his son promptly blew on candy. After a few weeks, he talked to his son about saving for a big purchase and the value of delayed gratification.
One year later, his kid came to him, money in hand, and said, “Dad, I want to buy an iPad.” He took his child to the store, but the kid came up short. My buddy paid the taxes and used it as a teachable moment. A 7-year-old doesn’t know about taxes but what a great time to learn about them.
On the ride home, the taxes discussion evolved into more money talk. Long story short, the next year, the son asked his Dad to take him to a bank to invest his savings into a GIC. The teller said he didn't have the minimum to invest - "Don't worry, my dad will pay the rest.” My friend turns to his son and tells him he wants interest on the loan he suddenly has to provide - another teachable moment at an appropriate age. The best part? The kid is taking an interest in learning, the dad is only telling him the information he needs as not to overwhelm him. Be straightforward, but don't overshare.
The teenage years: wants vs. needs
All their lives you supplied the necessities: the roof over their head, the clothes on their backs, and the food on the table. Now, as teenagers, they want trendy jeans and a video game console. They'll probably get their first job to do so. Their first pay cheque is a great time to teach them to put needs ahead of their wants. My mom taught my older sister the envelope budgeting system.
The envelope system involves labelling envelopes for wants and needs and using your pay to fill each envelope. You fill the needs envelopes first – rent, utilities, and groceries and with what’s left, you can divvy it among the “wants” envelopes.
My sister withdrew a certain amount from her chequing account on payday, leaving some money behind to transfer to her savings accounts. She sorted the cash into different “want” envelopes for various expenses - dining out, partying, clothes, etc.
She bought everything cash and learned the importance of budgeting her money. If the dining out envelope was empty, she could say no to her friends and invite them over for dinner. If she chose to go out, she’d borrow from a different “want” envelope, like new clothes, and understood the repercussions. In the end, she could get what she wanted and was saving up for her long-term needs.
Years later, she’s maxing out her RRSP every year, and that takes diligence. She doesn’t use envelopes, but the system still exists in a digital format.
The twenties and beyond: Be a role model, teach self-control
When your kids are ready to move out, you can only hope you’ve instilled smart money practices because they’re going to need them. If not, you may find yourself bailing them out of credit card debt and student loans.
When my wife and I moved in together, I still had student loans. I was only paying the interest complaining I didn’t have enough to pay any principal. She helped me find money. We stopped going out and just bought what we needed. We threw whatever we could at the loan and in three months, it was gone. I was amazed. She taught me a lot about self-control, something her parents had taught her.
Her parents were her role models. Her mom stayed at home to tend to the 4 kids while her Dad worked. They struggled to make ends meet but always made sure to have a good time. They travelled in a big van on long road trips with each parent swapping off every 6 hours, so they didn’t have to pay for a hotel. If two kids needed new shoes, one kid had to wait until the next month. Her mom still manages her bank book by paper every month.
Technology has made money-saving even easier. Facebook market place, community groups, and Kijiji have great finds for clothes and toys. We have a dedicated account for bills which automatically withdraws money from our payroll account. We fly on points, we use one of the best credit cards in Canada to save on groceries, and we’re always reading money blogs that educate us on making smart financial decisions
From the time they can talk, your kids will be learning about money and will see how it affects their parents' lives. Being open and honest in an age-appropriate manner will put them in good standing for years to come. Be a good role model, and your kids will succeed.