Teaching Your Kids to Save
In 2009, the federal government created the Task Force on Financial Literacy whose goal was to provide recommendations on ways to strengthen financial literacy among Canadians. The report was completed early last year and while it does have many excellent ideas, the reality is that they will take many years to implement. So parents, the choice is up to you – leave things in the hands of the government, or take it upon yourself to start building your children’s financial knowledge.
Parents can start teaching the basics of numeracy before age three so remember that it’s never too early to start. Have your child start paying for things with cash at a young age so that they learn the basics of trade principles. As they get older, consider starting them out with their own non-registered investment account. For example – when you decide to start giving them an allowance, you can do so with the understanding that 50% of it must go into their investments. Review their investment statements with them when they come in. The first time they see growth in their account, you can bet that their interest will increase as well. You might be surprised when they decide to put the other ½ of their allowance in their account too.
The next stage of their financial learning should also come from home. When your own statements come in each month or year, take this as an opportunity for a new lesson. Sitting down with your child and going over a mortgage, credit card, line of credit or car loan statement will provide them with exposure to information that they just can’t find anywhere else. Don’t be afraid to show them the credit card bills you haven’t paid off and talk about the interest amounts that you’d rather not be piling up.
When the time comes that your child gets their first job, another lesson opportunity is here. Talk to them about increasing their investment contributions. They could set up a monthly automatic contribution that comes out of their bank account right after payday. Just like the rest of us, you don’t notice the money missing when it’s taken automatically and it’ll be good practice for their future. Now that their earning income, they’ll also be earning RRSP contribution room. This would be a good time to start splitting their investment contributions into a second account. You can talk to them about the benefits of building up their non-registered account for shorter term uses such as their first car or a house down payment. Simultaneously they can learn about building up their long term savings in their RRSP account to begin building their retirement savings.
Finally, once your children are becoming adults and creating a life of their own, consider inviting them to join you for a few of your reviews with your own financial planner. Depending on what you prefer, they can sit quietly and observe or ask questions ask questions and be part of the discussions. The key here is that they’ll be able to see firsthand how the decisions you made in your younger years are affecting your retirement plans now, whether good or bad.
We live in a society that likes to keep their financial matters very private and we’re not used to talking about some of these things. This has unfortunately created a country with many people who don’t understand the basics of how a mortgage, credit card or investment account really operates. Without this knowledge, people pay preventable interest charges, rack up avoidable fees and take many more years than necessary to reach their retirement goals. I urge all of you parents to break this trend and put financial literacy at the top of your list for things you want to pass on to your children.