Financial literacy for kids: lessons by age

The most important part of teaching financial literacy to your kids is that the lessons are age-appropriate. While you might be excited by the volatility of the stock market, your six-year-old won’t find it nearly as fun. When it comes to financial literacy for kids, you should instead cater your money lessons to your child’s age and abilities. Here’s how:

Before age 5: focus on spending

Before age 5, the money lessons for your child will primarily focus on concepts and basic mathematics, primarily around spending. You can teach your child the very basics of budgeting, namely that we do not have unlimited money so we must make decisions about how much we can afford.

For financial literacy activities, practice simple exercises like giving your child an amount of money and allowing them to go shopping at a toy store. You can point out the prices of items and explain that they can only buy what they have enough money for. If they want a more expensive item, they will have to come back when they have more money.

At this age, you don’t have to introduce any rules about saving or giving or explaining cryptocurrency. What knowledge you can really convey to your child depends on how well they can count, which before they are school age may not be very well! Try to make learning about money fun, easy, and natural so you don’t inadvertently pass on financial anxiety instead of financial literacy.

More: Should you open your child an RRSP?

Age 5 to 11: introduce an allowance and a budget

At age 5 or 6, you want to provide your child with their own allowance so they can begin to make spending and saving decisions for themselves.

How much to give your child depends on your family’s budget, but most experts suggest a weekly allowance of a dollar amount equal to the child’s age. So a five-year-old would receive $5 per week, and a 10-year-old would get $10 per week, and so on.

However, the final number depends on what your child will use that allowance for. If it’s their spending and saving money, then a lower allowance will likely be enough. However, if you expect them to use it for things like outings with friends, extra-curricular activities, or their own cellphone plan, then a higher amount may be more appropriate. Consider going as high as $2 or $3 per week per year of their age for an allowance, depending on how many of their own expenses they will be responsible for.

Should allowance be tied to chores?

Some parents choose to make allowance conditional on the completion of household chores to teach kids that money comes from work. If they don’t do their assigned chores, they don’t get their allowance.

However, research indicates children are less likely to be successful at a task if there is a reward for doing it. So, if you want those chores done it’s better to leave the allowance out of it! Instead, teach your child that doing chores is part of their contribution to the household and is not tied to their allowance in any way.

Budgeting basics

Once you’ve settled on a regular allowance for your child, you can introduce the concept of basic budgeting. If you practiced shopping with your child before age 5, they probably already understand that not all money is for spending and sometimes we must save up for the things that we want.

Many experts suggest a 3-category budget of Spending, Saving, and Giving. You can choose to allocate an equal amount to each category or do a 50-30-20 budget split: 50% to spending, 30% to saving, and 20% to giving. Use two jars labelled “Spending” and “Giving” for your child to place their allowance allocation in each week. For “Savings”, set up a children’s savings account with a bank where they can make monthly deposits or you can deposit that portion of their allowance each week.

Help them to log in and check the balance monthly so they can watch it grow with interest. Teaching your child that they can use their money to make more money is a great precursor to teaching them about investing when they’re older!

More: What is the 50/30/20 budget rule?

Age 12 to 18: focus on money management

At age 12, your child should be able to set up their own chequing account and take more responsibility for their finances. In addition to their allowance, they may also now be earning their own money from a part-time job.

While cold hard cash is the most tangible way to teach your child money lessons, it’s not the most practical. Most transactions are via debit and credit, so it is important you teach your child how to navigate digital banking with their own bank account and debit card.

For teaching financial literacy, help your child to open a chequing account alongside the savings account you opened for them when they were younger, and make them responsible for managing both. If the idea of handing the reigns over to a pre-teen gave you a little jolt of fear because they might spend all their money, remember it’s important to allow your child to make money mistakes. In fact, the best time to make money mistakes is when they are children and the stakes are low.

Your child may spend all their money on a toy that breaks, or have to say no to going out with friends because they can’t afford it. It’s important that you don’t bail them out on these small mishaps, so they learn the financial lesson of failing to budget or overspending.

By their mid-teens, you want to begin teaching children about investing, credit, and debt.

More: The best budgeting apps in Canada

Now is a great time to talk about their post-secondary education and share how much you have saved in an RESP for them and discuss whether they will need to apply for student loans.

As part of their financial education, you also want to take the time to explain accounts like the TFSA. Encourage them to begin saving now so they can transfer their savings to a TFSA the year that they turn 18.

Finally, explain things like credit cards or car loans, so your child is equipped to avoid any debt traps in adulthood. Again, it is likely your child will make some money mistakes now and in the future, but good financial literacy can help lessen the long-term negative consequences.

More: The best student credit cards in Canada

Age 18 and beyond: be a money mentor

After age 18, your child is legally an adult and can apply for more complex financial products like credit cards, loans, and investment accounts.

Some parents continue to offer financial support to their children through their early twenties in the form of maintaining their allowance, paying regular bills (like a cellphone or car insurance) or providing them with financial gifts. You can decide how much financial help and for how long is appropriate for your family. Whatever you choose, make sure you communicate clearly to your children how much support you will provide and when that support will end. Cutting off financial support without notice can cause conflict and resentment and affect your relationship.

It’s likely that despite your best efforts to teach financial literacy, your child will make some financial mistakes in adulthood. If they confide in you about credit card debt in collections or a bad investment, it’s important to be supportive and not shame them for their mistakes. It’s up to you if you want to bail your child out of any bad money decisions or let them learn the hard lesson of building savings back up or paying off debt on their own.

Now is the time to encourage your child to save for retirement, build good credit, and explore larger financial goals like buying a home. You will have little to no control over your child’s finances at this point, but you can always give them good advice and help them become money smart.

As you age, consider speaking frankly with your child about your own finances and whether they’ll be receiving an inheritance. It’s up to you if you want to share exact numbers or be vaguer, but keeping communication channels open is always a good idea. Grown-up kids often worry their parents haven’t saved enough for retirement or are carrying large debts. Being honest about your own financial situation can relieve any money worries your children may have for you, and help them better plan their own finances.

More: How much do I need to save for retirement?

The bottom line

Money management is a life skill. It’s just as important to teach your child as it is to teach them how to walk or drive a car. But just like with those complex skills, you need to start with the basics and build on them with time. Good money habits start early!

Your child’s relationship with money will be largely based on your relationship with money, so take care to pass down a healthy, positive outlook on finances along with mathematics. You want your child to feel empowered and optimistic in managing their finances, so avoid communicating excessive anxiety, worry, or a sense of scarcity around money.

Teaching your child about money is a great opportunity to hone your own financial literacy skills. You might even find your own finances improve over the years as teaching your financial literacy becomes an opportunity to teach yourself!

More: How to make a budget that fits your money personality

Bridget Casey is the award-winning entrepreneur behind Money After Graduation, a Canadian financial literacy website aimed at 20 and 30-somethings. She holds a BSc. from the University of Alberta, and an MBA in Finance from the University of Calgary. She has been featured as a millennial financial expert by Yahoo! Finance, TIME Magazine, Business Insider, CBC and BNN. Bridget was recognized as one of Alberta's Top Young Innovators in 2016.

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