Financial literacy is one subject that may get overlooked in schools, so it’s up to parents to make sure their child learns valuable skills in money management as they grow up. There’s no definitive approach to teaching your child; what’s right for your family would depend on your principles and beliefs and your child’s personality. However, below are a few suggestions.
Give them an allowance
While your child is young, giving them an allowance can be a learning opportunity and can help them develop some good financial habits. Ways to give an allowance include:
- Providing an amount large enough that your child can set some aside as savings
- Giving an amount at regular intervals that is based on the estimated needs and wants for one time period, so your child can learn how to budget until the next pay day
- Attaching an amount to special tasks beyond normal chores to create a sense of earning
If your child is in university or college and learning to be independent, you may still need to control the flow of the money tap. Your child will learn how to manage finances a lot better if they practise keeping a budget.
Introduce them to investing
If your child has a summer job, you may want to encourage them to allocate some of their earnings to their education savings account, even if you’re in a position to pay for the bulk of the costs. You can also use your child’s summer job to introduce them to long-term savings using the Registered Retirement Savings Plan (RRSP). If your child is 18 years or older, you can use the Tax-Free Savings Account (TFSA) to introduce them to investing.
Introducing investing to your child while they are still young can acquaint them with the fundamentals of investing, such as compound growth, risk tolerance and diversification.
Beware of affluenza
As you get older, you may be tempted to make life easier for your child or grandchildren by giving them financial support. Provide too much support, however, and you run the risk of “affluenza”—the loss of initiative and independence caused by receiving too much wealth too easily. In other words, if you help out too much, your child may begin to feel entitled to everything.
There are no rules here, but there are ways to keep affluenza at bay by giving money in a controlled manner. Here are a few examples:
- Pay only for essentials, such as car repairs or home repairs, or “extras” for your grandchildren, such as summer camp or music lessons.
- Give small gifts over time rather than a large lump sum.
- Instead of a giving a lump-sum inheritance through your will, plan a series of payments through a trust.
Whatever approach you decide on, be sure to talk to your advisor so they can integrate it into your plan.