Make Type:

Larger Smaller Reset

'TIS THE SEASON
How to speak to your children about financial planning.

By: Trisha MacLennan, CFP

The holiday season is upon us. Many parents are beginning the annual hunt for that perfect gift for their child or children. Dolls are scrutinized, board games considered and electronics eyed with cost and functionality in mind. Financial planning is hardly top of mind at this time of the year. However, holding conversations with your kids about financial planning has the potential to be a gift that lasts a lifetime.

Even at a young age, children have the potential to establish good financial behaviours. For example, when you give them an allowance, do you just hand out the money or do you have a discussion around how that money is to be spent or saved? As a financial planner, I suggest to my clients with appropriate aged children to give them an allowance and have the child divide the money into several different piggy banks. To make it fun for the child, the piggy banks are varied in colour as well as size. The smallest piggy bank, which naturally would fill up first, is dedicated towards saving for a short-term goal. For a young child, this goal might be a toy or an upcoming birthday party for which they need to buy a gift. You as the parent will decide if you want the child to save for the full value of the item, or only a portion with you then contributing the balance of the funds. Subsequently larger and brighter piggy banks are used for medium and longer term goals, agreed to by way of discussion between the parent and child.

This technique works to educate a younger child about financial planning on a number of levels:

• It requires planning. How many piggy banks will be used and what size?
• It requires a discussion about goal setting. What are the savings objectives for each of the various piggy banks?
• It requires negotiation. Will the child save 100% for their goals or will Mom and Dad kick in the balance once a certain percentage has been reached?
• It requires decision making. Once the goals have been set, the parent and child can then decide how much to deposit into each piggy bank to reach the various goals in a reasonable time frame.
• It teaches patience, and the realization that some goals are worth saving for.
• It provides an incentive. Simple goals, reached quickly, will provide an incentive for the child to continue saving for the larger, more long term goals.
• It opens the door for financial discussions. The parent can draw parallels between their saving for a goal, such as a new car or family vacation, with the child's activities.
• It can be fun!

For older children, or young teens, the methodology is the same. The parent and child simply substitute various savings vehicles for the piggy banks. For example, a savings account at Mom and Dad's bank or credit union would be used for short term savings. Medium term goals might be represented by a cashable Canada Savings Bonds and long term savings could be used to buy a GIC that comes due in a year or more just when the funds are needed.

Have a discussion with your own financial planner before sitting down to talk finances with the children. He or she may have their own tried and true methods of how to handle such a discussion.

As a financial planner, I certainly hear some concerns from parents about involving their children in financial matters. But a discussion about finances does not necessarily mean you have to reveal details about your income and personal spending habits before the child is mature enough to understand. Instead you have the opportunity to instill some great financial habits at a very young age that may last a lifetime.

Finally, use your financial planner as a support network. Once you have started your child on some type of financial education, using piggy banks or savings accounts, bring them into a financial planning meeting at least once a year. Children are very proud to show off their accomplishments, and even a few dollars in a piggy bank is worth celebrating. Your financial planner can help assess the child's understanding of various financial complexities, and open the door to further discussions when they are ready.

From piggy banks to a lifetime of good financial behaviours - what a gift that could be this holiday season!