It’s a classic scenario that every young family experiences in one form or another, likely on more than one occasion. Towards the end of a big father-daughter day out to watch the Toronto FC game, after buying her a TFC shirt, a drink, French fries, and other assorted treats, as we filed out of the stadium we inevitably came upon an ice cream truck and, of course, my five-year-old asked if she could get a cone. “Sorry, sweetie, I don’t have any more money left,” I little-white-lied to her. “Well, then get some,” was her honest response.
Financial planning is something many adults struggle with. How is a kid who’s still in kindergarten supposed to understand where money comes from and where it all goes? Well, if you start early enough, you can teach your kids how to manage their money properly, long before they get themselves into real financial trouble as adults.
Knowledge you can bank on
Obviously, there’s a point when a child is just too young to understand – or safely handle – currency. But around the time she was four, our daughter got an authentic pink piggy bank as a gift. And every now and then we’d give her a few coins from our pocket, or let her hold on to the change after she’d purchased some well-deserved reward (with our money). Earlier this spring, we emptied that bank so we could go and buy her first “big-girl” bike. I think there was enough in there to cover the cost of the bell… Since then, she’s been rebuilding the fund, saving up for a Star Wars Lego set. Or at least that’s what it was the last time I asked. (This brings up another side benefit of this lesson: Having some time to think about it while their savings accumulate helps kids focus on which item they really want.)
Allow for an allowance
At risk of giving away my age (and sounding like I’m even older), my first allowance was 25 cents a week. Then again, I could actually go to the convenience store and buy something with that quarter – usually a pack of hockey or baseball cards. How much should you give a kid? Obviously, the child’s age and your own level of discretionary income will play a huge part, but one reasonable rule-of-thumb is to give the kid a dollar for every year old they are, with an annual $1 raise on their birthday.
If you want to use the exercise to double-up on the life lessons and also to encourage work ethic, tie the allowance to specific chores: Make your bed every day of the week, you get a dollar; clean up all your toys before going to bed, you get another. The flip side, of course, is that you don’t want to inadvertently set the expectation that there’s a reward for every task completed.
Whatever amount you give, encourage the child to save up that money for something they really want: a new toy, a bike, or a trip to an amusement park, for example. There’s no better way to learn the value of saving than getting a tangible reward for doing it. But you should also allow – or perhaps even encourage – the occasional “impulse buy.” This will help them weigh the value of a few short-term disposable treats, like a pack of candy, against the reward of being able to buy the newest book by their favourite author.
Baby’s first bank account
Piggy banks are great for a tactile savings experience but, eventually, you’ll want your kids to learn about saving and investing. All the big banks offer children’s savings accounts that waive a variety of fees. TD Canada Trust, for example, has a Youth account for kids up to 18-years-old, with no monthly fees and unlimited transactions. RBC’s Leo’s Young Savers Account is also free, but only allows up to 15 transactions a month before charging $0.65 for any on top of that. (Note though that non-branch ATM fees do apply, among other potential balance busters, so read all the fine print before you sign your kid up).
For children under 12, a parent or guardian must co-sign. But you’re also able to set various restrictions on the account such as maximum daily withdrawal amounts, or that the child can only make deposits and that withdrawals require a parents’ approval.
Once your teens have shown you that they can successfully manage their own account, one last baby step towards adulthood would be to get them a prepaid credit card. For me, explaining the pros and cons of credit is a series of lessons I hope I don’t have to teach any time soon.
Writer for RateSupermarket.ca