Take these crucial steps to prepare the next generation for financial responsibility and future wealth
By Jennifer Leathem, Special to Financial Post
What is the one thing you wish your parents taught you about money? I quickly found out that the responses were very different after asking clients, friends and colleagues this very question, and they were largely dependent on their own upbringing and attitudes formed about money at a young age.
Children will pick up habits from their parents, who may not have the experience themselves, or not be open to sharing. There are a few crucial steps to take to prepare the next generation for financial responsibility and future wealth. Here are a handful of them from a group of advisers.
Have open conversations
The most common theme when speaking with colleagues was that most wished their parents would have had more open conversations about money. It wasn’t so much about the lessons, but rather that money was never talked about. As children, we don’t know how much things cost, nor understand the value of money, unless our parents talk about it and share the financial experiences they are having, both good and bad.
“As many can relate, your children will have a financially different upbringing than you may have had, which comes with its own set of benefits and challenges,” William Pao, a financial adviser at Nicola Wealth, said. “What we find successful among our clients is to not ignore the differences, but embrace the fact that you’ve placed your children in a financially comfortable position and to prepare them for the responsibility early on.”
As an adviser, I have seen clients include children of all ages in financial review meetings. Younger children don’t understand the numbers or what they mean, but they become familiar with the importance of the conversations that are being had. Unfortunately, financial planning and investing is not something commonly taught in school, so children must rely on their parents and family for guidance.
One of the most important jobs we have as parents is to instil values in our children, including values about money. As children, we quickly observe what is important in our household. Do we see our parents spending on material things or do they value experiences? Is money spent on expensive possessions or saved for family vacations? Do education and extracurricular activities such as piano, karate and tennis lessons take priority? Family values dictate which “buckets” money goes to.
“Each family has their unique set of values. Explain to your children why you are choosing to spend money on one thing over another, not because you have to, but because you want to, and how it aligns with your values,” Pao said. “Communication, even early on, can play a big role in the message.”
Help children gain financial independence
If you don’t allow your children the opportunity to handle money on their own, how will they learn? It can start with something as simple as a weekly allowance or income from a part-time job. Talk through the options of what your child can do with their money — for example, spending, saving or donating — thereby allowing them to make their own financial decisions.
Vanessa Flockton, vice-president of Advisory Services at Nicola Wealth, grew up receiving a generous allowance from her parents, but had to cover all her expenses — such as clothing, gifts, transportation, entertainment — and quickly learned how to budget at a young age. It also provided her with independence and allowed her to make her own decisions. It meant she could spend on what she wanted, but also taught her the importance of saving for larger purchases and having money set aside for a rainy day.
Investing and the power of compound interest
Help your children get started when they are young and encourage them to save. Initially, this can mean setting up a bank savings account that they can view online. If they have one, share their registered education savings plan statements with them, so they can see the plans grow over time. Encourage them to open a tax-free savings account, which is a great place to help them save income from a part-time job, when they are older.
“It is vital for children to distinguish between saving and investing, as this is how one truly builds wealth,” Nelicia Braganza, Nicola Wealth financial adviser, said. “As a parent, if you can, offer to match a portion of your child’s savings and offer guidance on smart investment options. This practice will not only teach children discipline, but it will also provide them with a greater incentive to save as they watch their investment balances grow.”
The power of compound interest speaks for itself, and the earlier you can get started, the better.
Make it fun
From watching their savings grow to investing in their favourite companies, money lessons don’t have to be boring. Help your children set goals for savings or something that they want to purchase. Provide rewards or pay them interest when goals are met.
Arguably, the most enjoyment comes from giving. I have clients who set up a family donor-advised fund and make decisions as a family on which charities they would like to support. This will often happen over the holidays and involves children of all ages. Our clients find that it really brings the family together and is enjoyable for everyone.
Remember that you don’t need to be a financial adviser to educate your children about money and build their financial literacy. Simply expose them to money, allow them to understand the value of money and show them the importance of saving and spending responsibly. That will ultimately empower them to develop good money habits and manage their finances throughout their lives.
Jennifer Leathem, CFP, CIM, is a financial adviser at Nicola Wealth. This article should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions.