Teaching Children Wealth Management – A Life Stage Approach

With the technology boom and growth in emerging market economies (which has certainly helped Canada’s resource-rich economy), there are now over one million millionaires in Canada and 14 million in the US, with North America representing 44% of the worldwide total. ⁽¹⁾

Today, the premise that subsequent generations should have a better quality of life than the last is facing some strong headwinds – disappearing defined benefit pensions, high taxes, lofty real estate values and the rising cost of education, to name just a few. Along with the host of traditional moral values, teaching the next generation about the value of a dollar and how to manage it may be one of the most important wisdoms we instil in our children or grandchildren. Too often we hear accounts of adult children of affluence “losing it all” by acting irresponsibly with their finances and then becoming a burden on the rest of the family. Finding a sense of purpose and giving them tools to protect themselves -­­ like financial literacy – are key to nourishing the family legacy.

While many people feel uncomfortable talking finances with their children, we need to remove the taboo. Starting early can help prepare children to deal with potentially harmful social influences to which they are exposed in everyday life and to start building the connection between money and meaning.

In this two-part series, I take a life-stage approach, with a focus on instilling values and developing financial literacy before children find out the hard way that they don’t have a solid grasp of either one. This first part of this series focuses on children up to age 13. Teen years and young adults will be covered in the next edition of Nexus Notes.

Instilling Values – The Early Years (Up to age 9)

The value of a dollar

• This is a good one to start early – around the time they are learning basic math. The important connection here is time/effort and money in the pocket. Regardless of whether you believe in providing an allowance, children should have the opportunity to earn money. Give them some simple tasks that are interesting and achievable so they don’t lose interest.

Make choices with the future in mind

• Many people have heard the story of the Stanford marshmallow experiment in the 1970s in which children were tempted with a decision. After being presented one marshmallow, they were given a choice to eat it now, or receive two if they waited a short amount of time. When they followed up years later, the children who waited tended to have experienced better life outcomes than those who chose instant gratification. Developing this skill will have long-lasting positive consequences through learning how to prioritize finances at an early age. It also teaches the rudimentary concept of compounding and future value.

Begin to develop philanthropic values

• Start with imparting the concept of charity, which at this stage is best accomplished by example. Let them see you ‘give away’ your money and explain that we all have a responsibility to give back to the community. Then, help them identify and foster a passion so that they can follow in your footsteps.

How to save

• It is often suggested to use piggy banks, one for saving, one for spending and one for charity, to teach children how to allocate their tooth fairy money. Though it is a bit gimmicky, it does have its benefits and makes this first stage of financial management fun. For the slightly older ones in this group, opening a savings account will introduce them to interest income and the precursor to the concept of investment. Given current interest rate levels, you can incent them even more by agreeing to match or deposit a set percentage on top of what they stow away at the bank. Don’t make the account a vacuum. Let them take money out of it once in a while so that they feel that they have control over it, and let them experience buyers remorse when the stakes are low.

Differentiate between needs and wants

• Parents of young children take care of their necessities, so it’s really all about explaining the want. Examples can be made at the grocery store, in planning the family vacation or that much-desired toy. This is a key factor in shaping and establishing family priorities and values. The next time you have to make that decision, talk through it with your child so they hear your thought process.

Investments 101

• Teach the basics about investment early on. Explain the basics about putting money into something with the expectation that it will either grow or give back benefits in other ways. Kids as young as 6 or 7 can have fun playing a game of Monopoly and it is an effective way of not just practicing math skills, but teaching investment, budgeting, income, borrowing/lending and the role of a bank. This can help lay the important foundation for when they are ready to understand the bigger context.

Begin teaching financial literacy – The Tween Years (9-13)

Budgeting

• Children as young as nine or ten can learn how to manage a budget. A good place to start is to show them how you manage yours. Take them to the grocery store with a predetermined spending limit and make a list of what needs to be purchased so that the family can have a nice dinner that night. To add to the challenge, shave off a few dollars from the budget to show the importance of making good choices between products.

Investments 201

• Begin with the basic concepts… and repeat (repeat, repeat). Children need reminders at this stage. What are stocks, bonds, the market, depreciation, inflation and how does compounding work? What are interest rates and how do they affect us? Why do people buy real estate or put money into a family business?  Begin to create a personal connection with investing. Show them a couple of names in your portfolio holdings list that they might recognize. On a high level, take them through the path of a dollar spent at, say, iTunes, and how it ends up back in the pocket of the shareholders through dividends or capital gains.

Explore areas of interest it might lead to a career decision

• Following passions is a great start, but not all children have passions at this age. If they are still in decision mode on this topic, this is a good time to explain variances in the workplace and why people choose career paths that pay more or less than others.

Explain how credit works

• Without any explanation, seeing mom or dad pull out the plastic does a disservice to a child as it masks the exchange of money for goods and services – the definition of commerce, which is the most basic of economic principles. As credit card debt is one of the first and easiest opportunities for young adults to get into financial trouble, this topic must be taught early, and reaffirmed often. Emphasize that there must be enough in the bank to cover what’s being purchased on the card and if there isn’t, you have to pay it back with interest.

These skills are the building blocks for young children. Stay tuned for the next edition of Nexus Notes, where the skills and lessons grow in complexity and relevance for children who advance into their teens and young adulthood.