Why It’s Critical to Teach Your Children Financial Life Skills

Today’s world is moving faster than ever, and that includes the exchange of money.

How often do you make financial decisions per day, 10, 20, 30 times? Whether it’s the decision to buy organic food, new sports equipment for the kids, or gas for the car, financial decisions are a huge and fundamental part of our everyday life. Would it help if our kids had some guidance on how to make all those little decisions effectively, so they can create a solid financial future? You bet; there is an epidemic of adult children staying in their parents’ homes or moving back home because they cannot financially support themselves. Check out this NEFE study on parents financially supporting adult children.

When do you need to start? Now. There is a real urgency to begin talking to your kids about basic real-life financial decision making. There are different factors at play now than there were when we were kids. Technology and the speed of life makes it easier and faster to spend money - and with little or no emotion. When a person uses cash the pain mechanism in their brain kicks in and gives
them a nudge, so they feel the pain of handing over their hard earned money. With plastic, that doesn’t happen. This makes it very easy to spend money you don’t have and go into debt, sometimes devastating debt.

Kids and teens are spending more and more money at younger ages and marketers are well aware of it, and working hard to get a piece of the pie. Over $51 billion per year is spent by “tweens,” and over $250 billion by teens. 

The current societal consumer attitude of “I deserve it” versus the older more traditional approach of “I can afford it, I have the money for it,” can lead to long-term cyclical debt, especially if payday loans are involved. The interest charges and minimum payments can become challenging and lead to a vicious downward cycle that is hard to dig out of. In Canada, the ratio of credit-market debt to disposable income rose to 163.7 at the end of 2015, topping the previous record in 2014. In the U.S. surveys show two thirds of Americans are stressed over money and 50% have trouble paying their bills. This is unsustainable and destructive to the mental and physical health and well being of millions of people.

You Can Help Your Children Get Off to a Great Financial Start – 3 Tips

1. Don’t Do Everything For Them – They Need Hands-On Practice

Managing money effectively is a lot like learning a sport. You learn something new, practice it, make mistakes, compare the outcome to what you wanted, correct, learn more, practice, learn from mistakes, and progress more. Practice doesn't make perfect, perfect practice makes perfect and that comes with experience, education and reflection. It’s best for our kids to get the opportunity for these experiences with small amounts of money when the risks are low – and they live at home.

2. Use cash first before plastic

It’s very hard for kids and teens to learn good money habits if they have no tangible experience with the process of money exchange. To develop their numeracy skills in this real life situation it comes back to having experience and practice. Have you ever had the experience of seeing a waitress or cashier struggle to give you change when the cash register/computer broke down? It’s because there is no mental practice going on in daily life, technology is doing the math for us.

There are plenty of benefits from going back to this “old” way of paying including learning the value of things, learning to mentally compute basic addition and subtraction, and understanding the consequences of “when it’s gone, it’s gone.” Using cash will also be good for you – a study by MIT researchers found that people were willing to pay up to twice as much for a product when paying with a credit card and typically paid 20% more for the same item.

3. Use the give, invest, save and spend method (GISS) to teach money management

This framework is simple, hands-on and effective. Each category within this system plays a vital role in your child’s understanding of the various ways money can be used - and it helps prevent overspending. Your children

will have the opportunity to set goals and save for items they want, give to causes they care about, begin to create an investing nest egg and still have spending money for their “wants.” Dividing their money into these specific purposes has many benefits including increasing self-esteem when they reach their goals, delayed gratification and self-control, critical thinking and decision making, and personal and financial responsibility. You will also be pleasantly surprised by the meaningful and sometimes profound conversations you will share with your kids and teens as they share their dreams and goals and begin to achieve their desires with their own efforts. This system can start off with a DIY bank for young children, jars and eventually different bank sub-accounts to automatically divide paychecks. That way, the money is divided as you request - and you don’t miss it. This the easiest way to save, invest and reach your goals, you take the emotion out of trying to hold on to it until the end of the month.

Bonus: Start now

Your children learn by watching you, so it doesn’t matter if you aren’t discussing money with them; they are learning by observation. Even if they are only four or five years old, you can begin simple conversations about choices, counting coins and discussing needs and wants. Money beliefs are developed during the formative years and are wired by the age of seven by modeling and observation. Creating good habits at an early age is much easier than trying to change bad habits during adulthood. 

We work hard to keep our children safe from physical harm; we also need to keep them safe from financial harm and the destructive physical and mental stresses that can ensue.

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