It’s never too early—or too late—to bolster your financial skills. With each stage of life brings a new opportunity, and responsibility, to enable financial stewardship in yourself and your loved ones.
Whether teaching the next generation the importance of a credit score, or educating yourself on the purchase of your first property, every new milestone presents an opportunity to expand your financial understanding. But the benefits of a solid foundation of financial literacy are uniquely felt when established early and can lead to a lifetime of successful wealth management.
FINANCIAL BUILDING BLOCKS FOR CHILDREN
When Tiffany Harding’s children were born, she opened bank accounts for them—a place to put birthday money from grandparents, friends, and family—and set up a Registered Education Savings Plan as well.
“It’s a great way to start saving for them,” says Harding, vice-president and head of Wealth Planning, at Gluskin Sheff. “Those are two very important steps.”
When the children were old enough to start asking questions about money or wanted to buy something, Harding started giving them an allowance.
When her son was 10, for example, she took him to the bank and walked him through the process of opening a savings account and discussed what that meant.
Allowances are a popular way for many families to introduce money management for children. Some families may base it on chores, but not everyone agrees with tying it to behaviour, because it can change the dynamics around who really has control.
Regardless of your strategy, it’s not the amount that matters, but how you guide your children in using it.
This means teaching them how to save, how to spend wisely and even how to embark on their charitable giving journey.
“There are three ways to use money: you can save, spend or gift. Teaching those sorts of principles from an early age can go a long way,” says Gluskin Sheff Wealth Planning Vice-President, Mark Chan.
Ideally, it starts as soon as possible when they’re younger, he says. Teach them the basics of counting change, paying bills, getting groceries, withdrawing cash, discussing which charities to contribute to and why, for example.
As they get older, money from allowances may evolve into money from part-time work. If your teenager has a job and wants to buy an Apple Watch, for example, they should ask themselves:
-How much do I make an hour?
-How many hours would I need to work to make that purchase?
-Is it worth it?
-What sacrifices am I willing to make?
Being comfortable talking about money with your children is an important tool in teaching financial literacy, but it can be a challenging one that some families shy away from.
PREPARING FOR FINANCIAL INDEPENDENCE
While it may never be too late to learn about money management, experts say having a solid foundation by the time your children get their first part-time job or incur expenses and debt is ideal.
“Those later years of high school, right before they head off to university is a critical time for younger folks to learn the fundamentals,” says Erika Friesen, an analyst with the Gluskin Sheff Wealth Planning team.
The newfound freedom that comes with leaving home, going to university, also means having to be responsible for covering some of their own bills; preparing for their impending independence is important.
“For a lot of these kids … they have almost a loaded weapon in their hands every day, which is their phone,” says Gluskin Sheff’s Mark Skeggs, vice president of Wealth Planning. A phone linked to a credit card means access to an app store, the ability to make in-app purchases and access to a digital wallet such as Apple Pay or Google Pay, for example. Teaching them financial responsibility—in addition to how data charges work—is part of that financial literacy process.
“Anytime a child or a person is put in a position where they are being armed with a credit card or phone or something that is a live wire for running up an expense, they really need to have a foundation in place before having that type of luxury,” says Skeggs, who also recalls getting his own first credit card. Having a firm grasp on finances and how credit cards work meant he was able to use his responsibly as a young adult.
“You can get behind very quickly in life by taking on debt or not understanding debt, not understanding interest, and how interest on a credit card is so much worse than other types of debt.”
Friesen says she felt fortunate her parents supported her through university. But in exchange for their financial support, she submitted a monthly budget of what she thought she needed, and then submitted a monthly tally of what she actually spent her money on. She would get the funds for the following month after those expenses were “filed” with her parents. While this strategy could be perceived as fairly strict, Friesen acknowledged it was a helpful method to learn how to manage finances.
It is also a good stage to begin discussing the basics of investing, investment and other financial goals. Opening a tax free savings account when they hit 18 can be a first step. Some parents may choose to contribute towards those first investments, while others prefer their children earn it themselves.
Whichever route you take, the key is to communicate and guide your children.
If they bring home a tax slip, for example, use it as an opportunity to facilitate a conversation about taxes and the importance of engaging professional advisors, Harding says. It’s a good time to show the next generation how taxes work and what services—like hospitals, roads and schools—they support, she suggests.
AVOIDING SUDDEN WEALTH SYNDROME
Some children may be in a position to have inherited wealth or have a trust fund in place for when they reach a certain age or stage of life. It may seem like a blessing to not have financial worries or need a part-time job, but wealth management professionals say that kind of sudden wealth comes with its own pitfalls.
“It’s one thing to be a child of wealth. It’s another thing to be a child who has wealth,” says Skeggs. “All of a sudden you have those zeros in your bank account. It is a shock to the system. It is something that can be very hard. Some people find it very debilitating to deal with.”
He explains that even for those who are financially literate, being prepared conceptually can be very different from having to actually deal with wealth.
Giving too much, too early could disincentivize them from working hard and pursuing a successful career, Chan says, adding, families often include trust provisions so their children do not inherit a significant amount immediately. Such provisions may include age limits or the attainment of an educational degree, certificate or apprenticeship.
The sudden wealth does not have to be a burden, however. It can be another opening into philanthropy, instilling values that help children appreciate their fortune and life circumstances, wealth management professionals say.
And having your child learn about time management, budgeting, acquiring life skills and life experiences through part-time work can be beneficial, even if it is not financially necessary.
Having the right team and right professional advisors to guide them into the future is also crucial. This is especially important considering the significant transfer of wealth to the next generation that is expected in the coming decades.
“There’s some concern … the next generation of children may not be as financially savvy or as literate as their parents are; that the wealth could be squandered away with mismanagement and infighting says Chan. “A lot of parents want to make sure their kids can manage their wealth properly, that they can build it, protect it and not waste it.”
PARTNERSHIP IN FINANCIAL PLANNING
Financial literacy becomes even more essential by the time you reach your 20s and 30s. Budgeting and building a nest egg are top of mind as you simultaneously save for a downpayment on your first home, your retirement, a rainy day fund, a new family, child care, and create a financial plan to reach those goals.
At this stage, having financial expertise to help can make an enormous difference towards your targets—whether it is paying off your debts or retiring by a certain age, wealth professionals say. This plan should be revisited and updated every three to five years or ahead of major milestones to make sure you are on track or if adjustments need to be made, Chan says.
If in a relationship, it’s critical both partners are active in the financial planning and management process in order to avoid a worst-case-scenario should divorce, incapacity or death happen unexpectedly. It is a scenario wealth professionals encounter far too often, especially among older clients.
“It’s very daunting to have to go from zero to 100 immediately,” Skeggs says.
That’s where you need the right team and the right people around you that you can trust.
The Gluskin Sheff Wealth Planning team encourages their clients to involve their spouses—and grown children—in family conversations and meetings, so they have some exposure and understanding of the finances, even if they do not have an active interest. If the unexpected happens, they will be prepared to jump in, they will know who the accountant, lawyer and advisors are.
For Harding, it’s a requirement in wealth planning with clients for both spouses to be present. At home, she handles the finances and bills, but she makes sure once a year in January, she and her husband sit down and go through their finances together and with their professional advisors. It keeps him informed of where they stand financially, what their expected income and expenses for the coming year will be and whether they are on track or not. Annually reviewing your financial plan as a couple is also a powerful form of modelling good financial management for the next generation.
While there is no “one size fits all” instruction manual for financial literacy, many of the fundamental principles discussed here are invaluable for any stage or milestone in life.
For more information on how to facilitate financial literacy conversations, please download our guide.