From educating children on the most basic rules of wealth to having age-appropriate conversations about money, this Wealth With Sophia column provides practical tips on how parents can help their kids develop healthy financial habits to last a lifetime
“Kids develop many of their adult behaviours when they are under the age of 10,” says Will Rainey, founder of Blue Tree Savings, a family finance resource to help parents teach their children about money. “It’s these habits that are likely to determine their future financial well-being, so it’s important we help them form great money habits when they are young.”
Research from the University of Cambridge shows that our approach to money is largely set by the age of seven.
As such, it’s never too early to start teaching children about money. Here, Rainey provides some practical ways that parents can start to engage their children with money and start building healthy financial habits for the future.
The three rules of wealth
There are three simple rules of wealth that can serve as the starting point to talking to children about money:
1) Spend less than you earn or spend less than you receive
2) Invest what you save
3) Be patient
It’s key that children learn and understand these rules as young as possible so that they become a habit.
For many parents, an easy starting point is providing a weekly allowance. However, how can you best use that weekly allowance to teach children some basic financial principles?
Using the allowance, suggest your child divide it into three different jars: a spending jar, a saving jar, and an investing jar. Sit down together and discuss how much money to put in each jar every week. This is important to instil in them the importance of saving and investing their money from a young age.
This simple exercise helps children understand the concept of money and how to manage it. They learn to think about money in terms of saving and investing for the future, not just spending it on toys and treats in the present.
What to introduce and when
The next question to consider is: how do parents know when it's right to introduce certain topics to their children and at what age do we do that?
It's never too early to start teaching children about money management, and these age-appropriate tips can make a big difference in helping them to develop good financial habits for life.
At age 4, parents can start talking about money and allowances in a fun and interactive way:
- Start by introducing the concept of money and its uses. Children at this age may not fully understand the value of money, but introducing coins and bills and teaching them how to count money can be helpful
- Encourage them to save a portion of their allowance, such as putting coins in a piggy bank, to teach them the concept of delayed gratification and the value of saving
- Make learning about money fun by playing games like “store” where they can “buy” and “sell” items using play money
At age 7, parents can begin to talk about well-known companies and broad investing concepts such as charity, tax, and debt:
- Teach children about well-known companies and brands and how they make money through products or services
- Introduce the concept of charity by explaining how companies or individuals donate money to help others
- Explain the basics of taxes and how they contribute to society
At age 12, parents can start discussing earning money and entrepreneurship with their children:
- Encourage children to earn money by doing chores or starting a small business
- Teach them about entrepreneurship by discussing how businesses start and grow
- Explain the difference between assets and liabilities and how they relate to building wealth
At age 13 or 14, parents can introduce the concept of financial goals:
- Teach them about different types of income, such as earned income and passive income
- Encourage them to set financial goals and make a plan to achieve them
At age 18 or 19, parents can dive deeper into the topic of debt:
- Discuss different types of debt, such as student loans and credit card debt, and how they can impact their financial future
- Teach them about credit scores and how to build and maintain good credit
- Encourage them to start saving for retirement and explain the importance of investing for the long-term
By engaging children with age-appropriate concepts and activities, parents can help them develop a solid foundation of financial literacy that will benefit them for a lifetime.
As well as teaching your kids the rules of wealth and including your children in conversations about money, it’s also beneficial to involve them in everyday money decisions such as shopping so they learn good value for money.
One thing to remember when talking to children about money is to factor in some fun because life isn't just about making money and saving every cent that you have. It’s important to find balance in everything we do, including money management.
There’s no time like the present to start teaching our children how to be responsible with money, how to think long term and how to be patient about investing.