Insights
Periodic insights from our Investment and Private Client Teams on a broad range of investment and advice-related topics
Published by the Private Client Team at KJ Harrison Investors
No matter the size of the portfolio or the age of their children, many of our clients are wondering how to raise their kids with the skills and knowledge they need to be financially competent. Today, very few schools teach personal finance as part of the curriculum before high school graduation. As such, our clients have ranked financial literacy and competency as a high priority.
This paper suggests some approaches for teaching your children and grandchildren basic financial literacy skills. We had written a similar edition several years ago, but felt it would be relevant to recirculate it again.
Financial competency is not just about money. It is about instilling in your children values equivalent to overall good character. Kids with good financial skills are self-reliant, responsible, economically independent and know how to give back to their community.
Nurturing Financial Competence
Nurturing financial competence is a lifelong process. Some families we work with are comfortable talking to their kids about wealth, but they are unsure about how or when they should initiate the conversation. Others welcome a hand in preparing and providing structure for a family meeting.
Utilizing regular family meetings where every member has a voice and a chance to contribute can be one strategy in cultivating financial integrity. Before the meeting, be clear about your financial values (the guiding principles you use for financial decisions). Be able to articulate what the family stands for, what it values and how the family does and will use its wealth. At the meetings, encourage your kids to ask questions and listen to their concerns. Asking for their perspectives does not necessarily force you to agree with everything they say, but it does lend credibility to the fact that you may be listening and ultimately leads to shared knowledge and consensus around family wealth and values.
Most of the time, our knowledge of how wealth works, and how it affects our lives, happens in spontaneous moments, as we navigate through life events that touch upon money and personal finance in some way. Learn to make the most of these money moments. For example, around the time a child gets married might be a good time to talk about transitioning wealth to the next generation; the birth of a grandchild is an excellent time to discuss wills and estate planning. Over time, these smaller, in-the-moment, conversations will serve to highlight family wealth values and open up further conversation.
The Pillars of Financial Management
The key for nurturing financial independence is to build an understanding in your kids around the five pillars associated with basic financial management: SAVE (delayed gratification), SPEND (consume responsibly), INVEST (relationship between time, money, risk and return), DONATE (use money to make a difference) and EARN (make a living). The following chart illustrates some tactics and strategies you can use at various ages and stages. The five pillars remain constant but the skills become increasingly sophisticated over time.
| Tactics | Invest | Spend | Save | Donate | Earn |
|---|---|---|---|---|---|
| 5-8 years old |
Introduce the word equity (ownership), “I will be your equity partner in the new toy”. That way you share ownership. | Give your child a calculator when you are grocery shopping. | Establish three containers for weekly allowance: spend, save, donate. | Leverage the holidays. Take advantage of food bank drives/bins. Ask your child to buy one can from their “donate” jar. | |
| 9-12 years old |
Introduce the concept of collecting. Take your child to the OCAD sale and give them some money to buy a piece of art. | Have your child create a budget. Give them a budget for a weekend dinner or school supplies. | Help your child set up a savings account. Try to attach it to an event or goal that is at least a year away. | Have a family meeting on a charitable initiative or gift that matters to the whole family. | Encourage your child to earn money so that it is not just an abstract concept that parents are solely responsible for. |
| 13-15 years old |
Understand basic investing. Order annual reports from your child’s favorite companies and ask them questions: who the president is, how much money did the company spend. | Teach your child about credit cards and debt. Show them a credit card bill and ask them how much you are spending on interest. | Introduce the concept of compound interest. | As part of their high school volunteer hours, encourage your child to find a cause they are passionate about or use these hours to expose them to various charities. | Start discussing your child’s future ambitions. Openly communicate about different opportunities and career paths. |
| 16-18 years old |
Have your 18-year-old open a TFSA and/or an RRSP. | Ask your teen to look at billing options for various cell phone companies and present the best one. | Connect saving with future goals. Introduce the concept of future value. | Ask your teen to identify which of their favorite brands actually practice socially responsible business. | Encourage your teen to be curious. Have them meet with professionals to learn about their experiences and the skills required. |
Philanthropy and Financial Integrity
It is important to consider what portion of your wealth you want to give to charitable causes. Deciding how much to give to descendants versus how much to give to charity requires serious thought and consideration. Charitable giving can be a wonderful tool for promoting your family’s financial values and teaching basic financial skills. Strategic philanthropy is the process of becoming intentional about your giving (money and time) by investing in issues that articulate your family’s passions and are close to your heart. A family foundation or a donor advised fund offers children ongoing involvement in the financial affairs of the family and an understanding of how you can make a difference with your money. Whatever vehicle you choose, strategic philanthropy is about hopes and dreams and teaching your children to give time, talent and/or treasure to causes they are passionate about.
Summary
Teaching your children about money is very important. Children and young adults today have more spending power than ever. While schools focus on reading and writing, North American culture is shaping kids’ attitudes toward money from a very early age. The task of raising financially competent kids can be achieved through thoughtful planning, communication and by leveraging various opportunities as they present themselves.
ENDNOTES AND RESOURCES
Bodnar, J. (2005). Raising Money Smart Kids. United States of America. Dearborn Trade Publishing, a Kaplan Professional Company.
Calabrese, J. (2007). Preparing Adult Children for Inheritance: Maintaining Harmonious Relations Across the Generations in Families of Affluence. Harris myCFO, Inc.
Gallo, E. G. (2002). Silver Spoon Kids. United States of America: Contemporary Books, a Division of The McGraw-Hill Companies.
Godfrey, J. (2003). Raising Financially Fit Kids. Berekeley, CA: Ten Speed Press.
Lecter, R. K. (2000). Rich Dad, Poor Dad. New York: Warner Business Books.
Vaz-Oxlade, G. (1996). The Money Tree Myth: A Parents’ Guide to Helping Kids Unravel the Mysteries of Money. Toronto: Stoddart.
