The most important asset you can pass down is financial literacy

Forget real estate. Forget the inheritance. As great as it might feel to be able to pass down financial assets to your children/grandchildren, one of the most important things you can pass down to them is financial literacy.

No one is born knowing how to manage money, how to budget, to save, borrow and invest. But money can sometimes be a sensitive or uncomfortable subject to talk about, even within families. Parents sometimes shield their children from financial concerns and decisions. But if children and youths don’t learn by example, where will they learn? While many provinces have brought in more robust education programs in schools¹, reinforcing those lessons and concepts at home is critical.

The financial knowledge your child develops will stay with them long after they’ve entered adulthood – and prepare them to undertake financial decisions with confidence. In this article, we will look at:

• What is financial literacy?
• Why is financial literacy important?
• Starting kids early
• How to start: Practical tips for parents and grandparents
• Resources and Tools
• Lead by example

What is financial literacy?

The Organization for Economic Co-operation and Development (OECD) defines “financial literacy” as “a combination of financial awareness, knowledge, skills, attitudes and behaviours necessary to make sound financial decisions and ultimately achieve individual financial well-being”.²

Financial literacy means understanding and being able to use financial skills, such as earning, saving and spending money, managing your personal finances, budgeting, borrowing and investing. When someone is financially literate, they have the foundation to build a successful financial future.

Why is financial literacy important?

A lack of financially literacy leaves people unprepared to handle the financial aspects of their lives, whether through poor spending decisions or lack of planning. If you spend beyond your means, you can accumulate unsustainable debt, which could lead to bankruptcy and a poor credit rating, and possibly limit your ability to get a credit card, rent an apartment, purchase a home, or other negative consequences.

If someone doesn’t understand how saving and investing work, they likely aren’t preparing for their future. They’re unlikely to be saving for their retirement or for their child’s education. Financial illiteracy can have significant long-term consequences for that individual and their family.

Financial literacy also helps people to protect themselves from becoming victims of financial fraud. They’re better armed to spot and avoid scams.

Starting kids early

The earlier you start kids on their journey to financial literacy, the better off they’ll be. Even in their early years, kids are already starting to ask questions about money. And whether or not they get any screen time, they’re likely already being exposed to advertising, shopping, etc.

You want your kids getting comfortable with money early, learning concepts like how you earn money, how things are paid for and what things cost. Build on their financial foundation with education on saving, budgeting and planning for big purchases.

If kids learn the basics early on, they’ll be better equipped in high school as they become more independent, and when their financial decisions begin to have more consequences. This is the point when they may be earning their own money, saving for post-secondary education, and spending more time away from family.

How to start: practical tips for parents and grandparents

For young children

You can start teaching kids about money as young as age 3 to 5. Very likely, they’re already asking questions about financial concepts. Start with some of the basics:

• Spending: Discuss how you pay for things, and the difference between a need and a want
• Earning: Discuss the fact that things cost money, and how you earn money through working
• Saving: Discuss the idea of waiting to save up before being able to buy something

At this age, it’s often easy to bring kids along on routine shopping trips and start getting them comfortable with money and transactions. You could explore the concept of earning money if they ask about your work. The idea of saving money can be incorporated into a discussion about some large purchase they’ve requested.

For school-aged children

This is where the concepts become more real, where financial habits start to form. Somewhere between the ages of 6 and 12, you’ll want to build on and expand the basic financial concepts.

• Spending: As they find things they want to buy, help them make choices, learn about comparing prices, waiting for a sale, etc.
• Earning: Talk to them about how they may be able to earn money right now – odd jobs for family, allowance, etc.
• Saving: Use jars/envelopes to help them visualize their savings goals, and when the time is right, help them open their first bank account.

The pre-teen years are an ideal time to start practicing with money – spending it, saving it, and helping them to develop a budget. And because most financial transactions are done electronically or online, this is also the right time to talk to kids about protecting their money and personal information.

For teens and young adults

Teens and young adults are starting to earn money, to make financial decisions, and transact on their own. Kids are still developing their financial skills under many of the same topics – spending, earning and saving – but there’s more to learn as the discussions become more sophisticated. Your guidance and feedback can help them navigate successfully.

• Spending: Teens usually have more ready cash, and a desire for more independence. It’s around this time that they need to practice managing their resources – when to say no, when to focus on the future rather than right now.
• Earning: As they gain employment, the concepts of managing their money and tax deductions and tax returns come into play.
• Saving: As kids earn money, they can start setting larger financial goals and learn more about investing.

In the later teen years, it’s important to get them started on investing concepts so that by the time they’re in their early adulthood, they could be ready to do their own investing. Qtrade Direct Investing offers Young Investor pricing for those aged 18 to 30 years, with discounted trade commissions and no quarterly admin fees.

Resources and Tools

There is a world of resources available for you to help teach your kids, regardless of their age. Find one you trust and sign up for their newsletter to get all the latest information and resources. Many recommend books, online learning tools, or games and apps to help reinforce the learning material.

Here are just a few of them:

• Teaching children about money This Government of Canada site provides some basics on financial literacy for kids, and has a wealth of links to tools, games, activities and other age-appropriate learning resources.
• The Bank of Canada Museum has a wealth of tools and resources to support financial literacy, providing content by grade level and type (activities, games, lesson plans).
• Money and Youth This 15-module program from the Canadian Foundation for Economic Education (CFEE) also includes guides for parents. The content is aimed at youths aged 14+.
• Talk with our kids about money A website from the CFEE with at-home learning resources (including recommended movies, activities, games and crafts) organized by age and theme. Various ages
• Help! Managing your money on campus A site to help boost financial knowledge of post-secondary students, also from the CFEE.
• Raising Money-Smart Kids: How to teach your kids about moneyby Chartered Professional Accountants Canada

And if you’re looking for books that will help your kids learn about money, here’s just a small selection from the wide array out there:

• From Piggy Banks to Stocks: The Ultimate Guide for a Young Investor by Maya Corbic (age 10 and up)
• What is Money? by Kelly Lee (3-6 year olds)
• Moneybunnies series by Cinders McLeod (3-5 year olds)
• Moneywise Mabel’s Bursting Bank by Kalee Boisvert (4-6 year olds)
• If you Made a Million by David M. Schwartz (4-8 year olds)

Lead by Example

One of the best ways for children to learn sound financial habits is to watch their parents and caregivers. You make dozens of financial decisions every day. If you involve kids from a young age in some of your everyday money decisions, answer and encourage their questions, they’ll absorb those lessons better.

As kids get older, give them an understanding of some of your personal financial decisions, perhaps talk about financial lessons you yourself learned. When kids are in their teen years, they’re likely thinking about life after high school, like going to post-secondary school, getting a car, moving away from home. All those scenarios take money and planning. If you involve them in those financial planning activities, they’ll be better armed for their financial future.

References

¹ Mazloum, Toula “Here’s what’s being taught in terms of financial literacy at schools in Ontario,” CTV News. June 12, 2024 https://ottawa.ctvnews.ca/here-s-what-s-being-taught-in-terms-of-financial-literacy-at-schools-in-ontario-1.6924337  

² Recommendation of the Council on Financial Literacy, OECD https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0461  [accessed November 2024].

^{The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.}