Managing your money wisely is not something that comes naturally. It is something that is learned, put into practice, and achieved through mistakes and successes.
Our children’s relationship with money is no different. They need to value it, understand the headaches it can cause, and the problems it can resolve.
Here are some valuable lessons for kids that will help them develop a new-found relationship with money.
1. Understand the Relationship Between Time and Money
Things were simpler when I was growing up in the 70’s and 80’s. My biggest indulgences were buying hockey cards and 45 rpm records. My desire to collect both created a need for me to earn money.
In grade 4, I had two jobs. One job was cutting my neighbour’s three-acre lawn for $10/week. My second job was to deliver a community-based newspaper called The Liberal once a week. Delivering The Liberal, I was also responsible for collections and payables. I quickly realized that if I didn’t collect the money, I didn’t get paid. I also learned that I still had to pay the newspaper, whether I collected the money or not. I didn’t realize until much later that my paper route was my own distribution company, albeit on a very small and simple scale.
Kids need responsibility and the ability to earn money in order to understand the relationship between time and money. Whether it’s working around the house for allowance, babysitting, cutting a neighbour’s lawn or working in a store, receiving a paycheque for a job teaches your kids the value of a dollar (and how long it takes to earn that dollar).
2. Start Investing Early
Many kids don’t understand the merits of investing and the relationship between risk and reward, diversification and asset allocation, and the power of compounding returns. However, as someone in my early 20’s, it was difficult to envision an asset that could benefit me 40 or 50 years down the road.
Something that I did with my two boys was open up an investment account and give them the responsibility of selecting the kinds of investments they would like to participate in. It’s much easier to do today with the advent of Robo-Advisors. Also, many are primarily focused on ETFs (Exchange Traded Funds) which mirror the various stock exchanges but are not subject to the large fees of mutual funds. Through this process, my kids have learned that by taking on greater risk, they are also subject to greater market volatility, good and bad. They can be as involved or indifferent as they choose to be, but both boys now have a much better understanding of how the dynamics of investing work.
3. There are Benefit to Having “Skin in the Game”
When I went to university, my parents paid for my tuition, room and board, and books. I was responsible for earning my spending money during the summer. In hindsight, this may have been the one disservice my parents did for me.
Being away from home for the first time while managing my own time and money on my parents’ dime didn’t give me the appreciation of how lucky I was. I wasn’t mature enough to realize it, but if I had paid for at least a portion of my education, I likely would have worked harder, attended more classes, and truly relished the gift of a higher education. Studies have shown that the more a parent contributes to one’s education, the worse their marks tend to be.
If you’re worried about your child’s ability to make it through the semester on their own, you could consider a reimbursement program, similar to how companies reimburse their employees for successfully completing a course. This adds incentive to achieve better marks.
4. Understand Debt
Upon graduation, numerous banks were more than happy to offer me my first credit card. As important as it is to establish a credit rating, it’s equally important to be able to understand the consequences of debt. That $1,000 credit limit the bank extended to me showed me the importance of not compiling debt, and the hazards of credit debt. I accumulated a credit card balance, received my first statement, and quickly realized that incurring monthly compounding interest of 20% or more could cause a lot of financial headaches down the road. Establishing a credit rating is important, but it should not jeopardize your financial health.
5. Know that Financial Realities Will Shift
Sometimes, newly divorced parents try to comfort their kids, or compete with the other parent, by purchasing lavish gifts or trips. Do you best to avoid this.
After I was divorced, I started up a new business and cash was really tight. I took my kids aside and told them, Christmas was going to be tight that year, and as much as I wanted to give them the world, the reality was that I couldn’t afford to spend a lot on gifts. I thought they would be disappointed, but was surprised how supportive and understanding they were.
That tough conversation taught them about spending what you can afford, and the importance of not going into debt for a few superfluous presents. It also showed me that my kids valued the time I spent with them much more than presents under the tree.
There’s nothing that we won’t do for our children. And we’ve all been accused of spoiling them on occasion. But spoiling them too often may distort their future relationship with finances. For the average family, debt management, financial responsibility, and planning for the future are phrases that are etched in their vocabulary. By teaching our kids the fundamentals of fiscal responsibility, they will respect the relationship they have with money for the rest of their lives.