How we teach our children and young adults about finance and investing will vary dramatically among parents based on our different approaches to parenting, talking about money, and how we invest. Here’s the approach that I took with my own daughter.
Authoritative approach wins
Borrowing from the parenting literature, there are four general approaches that parents follow: authoritarian, permissive, neglectful and authoritative. In a nutshell:
- Authoritarian: “Do as I say or else,”;
- Permissive: “Do whatever you want,”;
- Neglectful: “I don’t care what you do,”;
- Authoritative: “Let’s set reasonable boundaries.”
Not surprisingly, authoritative parenting is the most successful approach. When we look at children and finances, I believe we can take the authoritative approach with great success as it incorporates freedom to make choices and learn— but within agreed-upon rules.
At Age Six: Counting and spending change
My daughter would like to buy a treat at the store. A great approach is to grab some money from the change bowl and show her how to count up coins. When we go to the store to buy a treat, I invite her to pay at the counter. What my daughter learns from this is twofold: she can use money buy things and she needs to pay the exact amount for each item she buys. The extension of this into games is that I can play store with my daughter and make price tags for items around the house. As she gets more familiar with counting coins, this game can evolve into using paper money (real or pretend) and making change.
At Age Ten: Learning about discounts and sales taxes
When my daughter wants to buy a present for her friend’s birthday, I set a reasonable price limit (say $30.00) for the gift. Let’s say we find an item that is $25.00 but is on sale for 20% off. I can show her how to calculate the discount on the calculator on my phone ($25.00 x 0.2 = $5.00), or the short cut to the new price ($25.00 x 0.8 = $20.00). At this point, I would explain how sales taxes work and show that the sticker price needs to be less than the amount she has to spend. To get the final price of the item, I take the sale price of $20.00, and multiply it by 1.13 (for Ontario’s 13% harmonized sales tax) to get the total including tax of $22.60.
At Age Fourteen: Learning to live within her means
She’s starting high school and I want to give her an allowance. We come to an agreement about the monthly amount, what it would cover (school lunches, clothes, toiletries, etc.), and what it would exclude (groceries, sports equipment, trips, etc.). I would e-transfer the monthly amount and let my daughter figure out how to spend it – freedom within set rules, as per the authoritative approach. Note that Canadian banks offer zero-fee accounts to students, allowing them to send and receive e-transfers as well as make purchases using a debit card.
At Age Eighteen: Learning how investing works
She’s heading off to university. If my daughter has managed her own money throughout high school, the first year away will not involve a dramatic change financially, particularly if she lives in residence. What is new at this age is that my daughter can open a Tax-Free Savings Account (TFSA: a tax-sheltered investing plan) once she turns 18. Why? Starting this early – even with as little as $100 – gives students the perspective and knowledge to make good financial decisions once they start earning money a few years down the road. The advances in financial technology, or fintech, are ideally suited to this younger generation. She can set up an account with a robo-advisor (low-cost automated index investing) and see first-hand how compounding works as the investments grow over time, as well as how market volatility affects her portfolio. In future years, her parents (and grandparents) are likely to give her some cash on her birthdays. As much as I would be tempted to tell her to invest it all, I will leave that decision up to her.
Postscript: For her upcoming 18th birthday, I’ll give my daughter an initial amount to invest in a TFSA with a robo-advisor. We followed each of the above steps when she was 6, 10 and 14, so I believe she’s ready for the next step…