Summer courses at the school of life

How long would you have to work to pay for those inline skates? Using summer vacation to teach your kids some important financial lessons.

Yes, they’ve just put their book bags away. Still, summer offers all kinds of opportunities to teach kids a few financial basics that will stand them in good stead their whole lives. It might even be fun! Here are a few things you might try over the next few months – and beyond.

Money 101

The characters in the Peanuts comic strip sold lemonade and psychological advice for five cents. Not bad, but today’s kids could surely do better. Why not let your children handle part of this summer’s vacation budget? Perhaps the snacks and treats portion, or amusement park spending. Not only will they feel more responsible, but you’ll be giving them some first-hand experience with short-term saving, one of the three basic principles of financial management.

Indeed, experts agree that the best way to help children develop a healthy relationship toward money is to teach them early on about three fundamentals:

  • income
  • short-term savings and expenses
  • long-term savings

Keeping it age-appropriate

The following diagram shows how a child’s financial education might evolve over the years.

Learning about money
  • Ages 2-6
    With very young children, it’s best to provide a piggy bank and give them a little pocket money every week. This will help them learn how to save some and spend the rest. Here’s another good idea: involve them in grocery shopping and put them in charge of finding the best deals.
  • Ages 6-12
    As they get a little older, children can start to understand the connection between work and income if you replace their pocket money with a regular allowance, paid in return for household chores, for example. How much should they get? Some people suggest $1 a week for each year of age. Others think that’s way too much. You get to decide what works for you. The important thing is to make sure the compensation is consistent with the work done.
  • Ages 12-16
    With time, a piggy bank can give way to an interest-bearing bank account and, soon afterwards, a long-term savings account. In fact, some experts suggest setting up three separate accounts (or three different jars, if you prefer!):
    • one for sort-term expenses (no more than 75% of income)
    • one for long-term savings (at least 20% of income)
    • one for unanticipated expenses or even donations (about 5% of income)

Here’s another good idea: let your child manage a budget, say, for cafeteria meals or going out with friends.

  • Age 16 and older
    Time to get a job! It’s important for older teens to look outside the home for their income. Encourage them to file their first tax returns: they probably won’t have any income tax to pay, but it will allow them to start accumulating valuable RRSP contribution room and learn about retirement savings. Make sure they know about any RESPs you have set up for them. And consider some original gift ideas, such as units in a mutual fund that holds shares in the company that makes their favourite running shoe or MP3 player.

Help them build confidence

Money should not be a taboo subject in your family. Children who are taught early on to understand the principles of exchange, savings, interest, yield and even credit feel more confident when they face their first real financial challenges. With that in mind, it can be a very good idea to introduce your young adult to investing and arrange a meeting with a financial advisor.

What if your children make mistakes? All the better. It won’t take them long to realize that dipping into their emergency fund to pay for those inline skates is not the best strategy for a successful summer!