By Lindsay MacAdam
I dig into my wallet to find some change to give my two-year-old nephew for his very first piggy bank. He stares eagerly at me until I pull out a quarter; he grabs it and shoves in into the ceramic slot like a pro. “Money pwease,” he asks with confidence — he wants more money and he knows how to say it!
But is this coin addiction harmless for a youngster or should a financial education begin at birth? Kelley Keehn, an Alberta-based financial expert and author of The Prosperity Factor for Kids, says a piggy bank is the first step to a child’s money-saving future and it shouldn’t be taken lightly.
A December 2004 Bank of Canada study revealed that Canadian consumers are $752 billion in debt, up 36 per cent from a decade prior. Keehn says that this lack of financial awareness in adults will spill over to their children if they are not properly educated about how to manage money. If children see their parents charging everything to their credit cards, paying bills late and making frivolous purchases, they are likely to repeat the same behaviours when they are adults, she says.
Luckily, Keehn has developed a practical plan that will teach your kids how to manage their money for life.
Age: under 5
Type of Account: Fun with money (first piggy bank).
Amount In: This piggy bank will hold all the money your child receives until they reach the next phase of saving.
Usage: This account is completely under the child’s control and can be used for anything, anytime.
Keehn’s Tips: “Teach your child about dollars, coins, their value and what they can purchase with them. Keep the spending and filling of this bank fun and pleasurable.”
Type of Account: Targeted savings (second piggy bank).
Amount In: With your child, determine a reasonable percentage split between the first piggy bank and the targeted savings bank (i.e. 50/50, 40/60). Get a new piggy bank that will hold the desired percentage of income for short-term savings. Set savings goals that will be reached within 1-12 months.
Usage: Emptied to make purchases once short-term goals have been met.
Keehn’s Tips: “The subject of allowances is an ideal and recommended topic for this age group.
“Consider discussing the amount of allowance paid, what activities and duties are required for payment and the conditions necessary for the child to receive an increase in allowance.”
Type of Account: Long-term savings (first formal bank account).
Amount In: The allocation of money between the three accounts should again be decided with the child. Set savings goals that will be realized in 1-3 years.
Usage: Emptied to make purchases once long-term goals have been met.
Keehn’s Tips: “Assist your child in identifying income-generating opportunities. Perhaps they can shovel snow, cut lawns or rake leaves on the weekends for extra cash. You might enlist their assistance in your summer garage sale with a commission to the child for all that is sold in your sale.”
Type of Account: Credit account (mock line of credit from parents to child).
Amount In: Determine with your child an amount of credit, the terms of payback, any interest that will be charged and the consequences for non-payment or late payment.
Usage: If an expensive item happens to be on sale, and all of the child’s savings have been allocated elsewhere, they may choose to use their credit to make a purchase.
Keehn’s Tips: “Teach your child about credit, interest and responsible usage so that they will be prepared and knowledgeable when they receive their first real credit card in a few years.”
Note*** Each new account is in addition to (not replacing) the ones before. Keehn stresses the importance of maintaining the first piggy bank to ensure that a portion of income is always put aside for pleasure.
In addition to the points discussed above, here are three extra tips that are important to keep in mind when teaching children to manage their money:
1) Explain why.
At the initial piggy bank stage, your children will probably be too young to understand the whole process. Once more accounts come into play, Keehn says it is important to “take time to dialogue with your child about the reasoning behind the accounts and assist them with making some of their own empowering money decisions.”
2) Giving children control teaches them valuable lessons.
Allowing your children to make their own spending decisions, as opposed to the parent purchasing everything for their child, makes them appreciate the value of money and make wiser spending choices.
3) Savings goals may need to be negotiated.
If you feel your children’s goals are too steep to be met in a reasonable amount of time, you may want to agree to match their savings (perhaps $1 for every $1 they save). This will encourage them to save their money and may keep them from feeling discouraged by a large savings goal that seems insurmountable.
Kids should still be allowed to be kids, so don’t lay it on too thick. Keehn suggests keeping your child’s cash curriculum simple and fun, to prepare them for a future of using money armed with the right financial knowledge.