Many parents avoid teaching children about money. It can feel strange talking to a child about what are often very real, adult-sounding issues, but the reality is learning about money at a young age can pay off big time in the future.
Knowing the basics of money management early helps prepare a child for adulthood. Developing good financial habits are going to be incredibly important, especially in the early years of their adult lives.
That all said, it can be tough knowing where to start. That’s why we’ve put together this helpful guide; we’ve tried to lay out in a somewhat chronological way the concepts that can be useful to review when trying to convey the right financial habits to children and teens.
Step #1: Wants Are Not Needs
One critical step in developing a child’s understanding of money management is getting them to understand what they need versus what they want.
Teaching this foundational concept is essential in helping a child control their impulses and learn to save money. While it may seem obvious to most adults, children of a young age struggle with it.
The good news is that most children will learn this concept on some level on their own, but it helps to try and cement the idea in their heads. Don’t rely on them to learn from experience; actually sit down and explain the concept.
When they desire something, try to have them articulate why and establish whether it is something they want or that they need. You can still indulge their wants, but there should be a clear line between luxuries and essentials.
When doing this, try to never hold any purchases of things a child needed over their heads. A child doesn’t control their needs and, as such, can’t be blamed for them.
While it makes sense to mention purchases of wants when they want you to buy a new toy or game, filling their needs should be a matter of course. After all, they are your child and your responsibility.
Step #2: Learning to Prioritize
Once a child learns the concepts of wants versus needs, you should then try and reinforce the idea of prioritization. What is most important to them? And, all else being equal, which of a series of choices do they want more?
Humans, especially children, have a hard time prioritizing when it comes to money. We often make purchases based on convenience or impatience rather than the purchases that make the most sense based on what we want.
For instance, imagine a child has 50 dollars. An electronic game they really want costs 60 dollars. It makes sense for the child to save or ask if they can do some chores for the remainder of the cost.
However, many children will instead spend 20 or 30 dollars at a toy store if given the opportunity on toys they weren’t thinking about beforehand. Even adults often act similarly; we are an impatient species.
Encouraging children to wait is important. One good way to do this might be to have them articulate why they want to make a purchase, especially if they seem to have changed their mind.
For example, “I don’t want to wait” isn’t a very good reason (unless they have to wait for months), but “I heard the game isn’t very good from my friends” is reasonable.
Step #3: Adults Have Big Expenses
The average Canadian adult has about 73K worth of debt, primarily due to mortgages. We also have a number of expenses to think of, from car payments to food to a child’s school supplies and more.
On some level, it makes sense to hide some of this from children. We want them to live a happy childhood, and discussing money issues can stress them out. However, these issues can’t be a wholly taboo topic to talk about with children, or they’ll be unprepared as adults.
Around their early teens or even a few years earlier, most kids will be mature enough to discuss the basics of expenses with them. This understanding can help children understand what requests are reasonable, somewhat expensive, or downright impossible for you to fulfill.
Be honest with them. Adults have a habit of thinking children can’t understand or handle these concepts, but they’re not actually that difficult. It’s basic math; you make X and lose Y each month.
You also won’t be able to hide financial difficulties from most children. You don’t need to constantly talk about them, but they’ll notice the signs you have less money than their classmates.
It’s also worth discussing those differences and how some families have less and more than your own. You’ll want to reinforce neither they nor anyone else should ever feel guilty about being lower income than someone else.
Step #4: Review the Specifics of Finances
Around the same time a child is learning about expenses, you can also start to teach them some of the core basics of how finances work. This process is actually somewhat easy; start showing them what you do on a regular basis.
Talk to your child about the bank you use (or whichever you think will be a good option for them in the future) and show them how the site works. Teach them how to set up autopayment for bills and similar expenses.
You can also talk to them about the specifics of different types of ways to save and invest. However, warn them about the ways these options can go wrong as well.
If you have your own investments, explain the choices you’re making. You should acknowledge any failures, too; your bad stock picks can help a child avoid the same mistakes in the future, for instance.
When tax season comes along, walk your child through the process, explaining each step. This is an essential part of becoming an adult; too many young adults have no clue what they’re doing during their first few tax seasons because they never had an adult sit down and explain it.
Step #5: Setting (and Reaching) Long-term Goals
At this point, the concepts being reviewed are complex enough that your child should probably be solidly somewhere in the teenage range. It’s time to discuss how to set serious financial goals and make the steps to reach them.
A good place to start for teens is figuring out how they will purchase a car and pay for university. You may also want to discuss what age they aim to move out and how they’re going to accomplish that goal too.
This is a discussion that is going to vary quite a lot based on your family’s financial situation, where you live, and more. For some families, these are easy questions. Others will have to think hard and work together on these goals.
In many ways, this is the stage where a lot of the groundwork you’ve tried to lay will come into practice. For many teens, this will be the first time they’ve had to think hard about money management.
The good news is you’re there to help. You can discuss how to request loans from companies like ours, if they’ll need a job, what you’re willing to give, and more. The focus is on their goals, but it still should be a team effort.
Explain to them how to control one’s debt and prevent it from running away from them. Things like credit and loans are useful tools but should be used to meet specific goals, not indulge in luxuries beyond one’s means.
For more info on how loans work, click here. On that page, we discuss the application process in a bit more detail, how payments work, and more. Just keep in mind you must be 18 to actually apply.
Step #6: Taking Their Money Management Skills Into Adulthood
As your child approaches 18, it’s time to make sure they have all the money management skills they need to transition into adulthood. More and more, you should be able to trust them to make their own financial decisions.
Check in with them on their financial goals and their progress towards meeting them. Figure out a basic career path together and how they’ll be using their paychecks.
They should have an understanding of the 80/20 rule (or some similar saving principle). For those unfamiliar, this is a method of saving that requires you to always save at least 20 percent of your paycheck for future needs, spending the other 80 percent as needed on expenses and luxuries.
Your goal is to make your child financially independent as soon as possible. That doesn’t mean you have to stop helping them or otherwise throw them to the wolves. It means they should go from needing your support to it being a useful supplement.
At this stage, be fully honest with your child. Discuss your own financial struggles and mistakes, even if they embarrass you. That way, they can learn without making the same errors and have a leg up in adulthood that you didn’t.
We Can Help Meet Financial Goals Faster
Teaching a child about money management is about preparing them for the future. As they learn how to better save, invest, and otherwise meet their financial goals, they are better able to meet that future with confidence.
If you’d like to learn more about how we can help one meet their financial goals faster, contact us. We can discuss how the loans we offer work and what the best option might be for your particular needs.
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