What to teach kids about money, and when

Children and teenagers need better financial literacy training. That is a point everyone can agree on. Consensus is lacking, however, around just who should be providing it.

Parents don’t always feel comfortable providing instruction — often because many lack core formal money management skills themselves and don’t want to start their kids off on the wrong foot. The education system, on the other hand, typically views financial literacy as a life skill rather than an academic endeavor: With so many other priorities in the curriculum, so the thinking goes, what do we sacrifice to make room for something that could just as easily be taught at home?

The result is a slipshod system of trial and error like we have today, where the average Canadian owes $1.70 for every dollar they earn and at least half of the population reports struggling to manage basic household finances.

Certainly, if something won’t change bureaucratically, it’s up to parents to take up the challenge as best they can. Following is a general breakdown of financial concepts kids are mentally and emotionally capable of understanding, along with some helpful conversation starters to guide your discussion.

Level 1: Children aged six to seven years

Focus on basic concepts related to income, savings, and making basic choices.

1. How and why you earn money: Discuss why you go to work every day, what you do for work, and how that translates to tangible outcomes such as food, shelter, clothing, and leisure for yourself and the entire family.
2. How savings work: Discuss the need to put some of your money away every month in case of emergencies (like if the car broke down), as well as the need to save for things you want but can’t afford right now (like a Disneyland vacation).
3. Wants, needs, and scarcity: Discuss the difference between needs and wants and how most people tend to desire more things than they have money to buy. Provide mental and emotional strategies to help them decide whether something is a want or need and whether they can afford it.
4. Opportunity cost: Discuss the impact of their present decisions on future outcomes. For example, a dollar they spend on candy is a dollar they cannot save toward a new bike. An hour they spend watching television is an hour they cannot spend improving their soccer skills.

Level 2: Children aged eight to nine years

Begin introducing more tangible skills and a practical perspective on money.

1. How to operate a bank account: Open a youth saving account together and discuss how deposits, withdrawals, and interest work. Also, discuss the importance of protecting their ATM card and pin number.
2. What are goods and services: Discuss why consumer goods cost what they do (e.g. costs to produce, ship, pay store employees, the impact of name brands vs. generic, etc.), how people are paid for services they provide (commission, hourly, tips, etc.), and how to get the most value for every dollar spent.
3. The difference between fantasy and reality: Discuss how TV and movies don’t paint a realistic notion of wealth and lifestyle, and lower their expectations around common expenses such as how big of a house or what kind vehicle they could afford on an average income.
4. Notions of salary and allowance: Introduce a small allowance based on performing certain chores (taking out the garbage, cleaning their room, emptying the dishwasher) every week. If they don’t perform the chores, do not provide the allowance.

Level 3: Children aged 10-11 years

Build practical skills around using and managing money responsibly.

1. Allow supervised debit card payments and online transactions: Discuss basic norms and processes that go into buying and paying for something in the store or online and allow them to make purchases (either for themselves or for you) under your supervision.
2. Budget and purchasing planning: Discuss the importance of a budget and show them how to make one. Use your own as an example if you feel comfortable, or simply make up some numbers if not. Encourage them to create a monthly budget based on their current spending and saving goals (e.g. walking around money, a new bike, a car when they turn 16, university, etc.)
3. Introduction to credit: Discuss what credit is, how it works, and why people use it. Be sure to reinforce the potential pitfalls of using too much credit, and the consequences of not paying bills on time.

Level 4: Children aged 12-14 years

Time for a reality check. Introduce some of the concepts that make managing money more than a simple numbers game.

1. Gross salary vs. net salary: Discuss common payroll source deductions (e.g. income tax, EI, CPP, health benefits, etc.) and why what they will earn in their job will often be much less than what they take home.
2. Influence of marketing and advertising: Discuss common tactics marketers will use to make their good or service seem better than it is (photoshop, unrealistic claims, fake reviews, brand equity, etc.) to make their product / service seem more enticing or valuable.
3. Consumer rights: Discuss the laws and resources available if they are duped or unfairly treated by a retailer or service provider (e.g. buyer’s remorse laws).
4. Simple interest, compound interest, and impacts on savings and loans: Discuss how interest works, how it’s calculated, and how it can be both a benefit to grow savings and a pitfall to make debt increasingly difficult to manage. Demonstrate the difference between simple interest and compound interest over several years.

Level 5: Children aged 15-17 years

Prepare for financial independence.

1. First job: Discuss how to build a resume and cover letter, interview skills, how to negotiate salary, how to succeed and advance at work, the difference between salaried and hourly pay, and how to manage an income.
2. Basic contracts: Discuss how to read a contract and know what they’re agreeing to before signing up for any service (e.g. mobile phone, credit card, internet / cable, rental agreement, etc.).
3. How to use credit: Discuss the purpose of and best practices for using various types of credit (e.g. credit card, line of credit, personal loan, auto financing, mortgage, etc.). Discuss credit ratings and how these work, down payments, and how to avoid becoming overburdened by debt.
4. Advanced banking services: Discuss various products and services banks provide, and when and where these may be appropriate (e.g. overdraft protection, insurance, GICs, mutual funds, RRSPs, etc.).

Learn together

Your local bookstore and library — and the internet — are fantastic resources for insightful, engaging, and age appropriate financial literacy tools. Consider incorporating this literature into your conversations and having fun with the process. The less these lessons feel like work and the more they feel like an endless process of discovery and opportunity, the more engaged your child will feel in the process.

The Financial Consumer Agency of Canada also has plenty of free, age appropriate resources for you to take advantage of.