Kids and money

Allowance and financial literacy for kids

My 11-year-old son recently spent just over $300 on a remote-controlled car, and I was pleased about it.

Not happy about having another toy cluttering up the house – although this one is a few steps above the typical toy store RC car. Not even happy about the spending decision he made. I could’ve pointed out dozens of things he would have been better served doing with that kind of cash (like saving it for important purchases later in life).

What I am very pleased about is the process that got him to that point.

He was goal-focused. It took him about a year and a half to save up for that car. Allowance, birthday money, Christmas money, and the odd performance incentives we offered him were all (virtually) dutifully saved to achieve his dream of ownership of this particular vehicle.

He had waffled from time-to-time on what make and model to buy, but the ultimate goal of quality RC car ownership was always there.

He was willing to delay gratification. He spent some time projecting his potential income into various points in the future, and soon realized that if he really wanted to be able to buy his dream RC car, he was going to have to make some sacrifices. His situation did not allow for regular dips into cash to satisfy short-term cravings – candy, lesser-value toys, the latest middle-school craze. He had to be a diligent saver to reach his goal.

And we consistently declined to extend him any credit – any money he wanted to spend had to be fully his first.

He learned about money management. We used Excel to make his financial projections. At one point while we were tinkering around with different scenarios, he wondered aloud if we could turn me and this Excel program into his own personal banking situation. His allowance wouldn’t come in cash, but as an entry in the spreadsheet. His birthday money would be handed to me, and I would add it to his digital stash.

He realized that if he had cash in hand, he’d look for ways to spend it (sometimes, the apple doesn't fall far from the tree). But if he just allowed it to accumulate without even seeing it, he’d reach his goal much more quickly. He showed an insight into his own weaknesses, and a willingness to mitigate them far beyond what I expected.

There were a few missteps along the way. His RC vehicle obsession pushed him to make a mid-term purchase of a lesser RC vehicle ($60-ish bucks, and has been run all of an hour or two in the past year) that when pushed, he would admit was a bit of a spending mistake.

But those kinds of mistakes are all part of the financial literacy learning process. Better making those now and realizing it, then not being aware of those traps later in life when they have much more serious implications.

He has learned lessons about personal finance that I didn’t until I was much, much older than 11.

In our home, we adopted a Share, Save, Spend allowance program. All money he gets is split up into these three categories. Share goes to a top-of-mind or favourite charity. Save goes into a real bank, and reserved for larger purchases later in life – education, car, home. Spend is what’s available to our child.

We don’t have hard rules about what per cent goes in what category. Our son has a naturally generous and giving nature, so we don’t need to push the Share component. He regularly impresses me with his willingness to give to those in need. Every few months, or after a particularly big windfall (his grandparents are usually good for a couple of twenties around birthday time), I will exercise my parental authority to put some of his money into his bank account to Save. There are some complaints, but it’s pretty minimal.

It’s the Spend component that was the sole source of his funds for his big purchase.

And I believe our allowance program gave him the opportunity to learn important lessons along the way.

One of the most direct ways your child can develop financial literacy is in managing their own money.

There has been much debate among child development experts and parents as to how best to go about this. There are some who believe there should be no money provided, no matter how it’s presented. Try tell that to my son. Or to me. I’ve seen first-hand the lessons my son is learning about money management.

Most of the contention revolves around whether children should just be given a regular some of money with no strings attached, or whether whatever money a child receives should be tied to household tasks.

Whichever side of the debate you fall on, my son’s example shows there are definite benefits to giving your child the opportunity to make decisions about money.

The other main question is – how much?

This is a very individual decision, based on personal values, and family circumstances. Some tie a dollar value to a child’s age, or to the value of the tasks completed around the house.

My belief is that it needs to be substantial enough to allow your child the ability to make meaningful decisions about saving, spending and sharing. A dollar each week is not going to go far in either of these three categories. If a child is going to develop money management skills, there needs to be the means to make impactful decisions to him or her personally.

Unfortunately, my son is already contemplating saving for another, even larger RC vehicle purchase.


Financial literacy for kids

November is Financial Literacy Month in Canada. We want to help promote financial literacy for kids.

A good two-part definition of financial literacy comes from

Financial literacy is the set of skills and knowledge that allow you to understand:

    • The financial principles you need to know to make informed financial decisions, and
    • The financial products that impact your financial well-being.

We all want the best for our children – emotional, spiritual, physical and financial. We spend a lot of time talking to our children about school, friendships and the like, but how engaged are we in helping our children develop financial literacy?

The BMO Financial Literacy Poll conducted by Pollara in March of 2013, found that 96 per cent of Canadians felt schools should be doing more to teach children and teenagers about money. The same poll found only 18 per cent of parents spend a lot of time discussing money and financial matters with their kids.

A Harris/Decima survey commissioned by the Canadian Institute of Chartered Accountants (CICA) in 2010 approached these questions a little differently. Their results had 89 per cent of respondents saying parents have a lot of responsibility for children’s financial education, and 78 per cent said they had tried to teach their children about money – with varying degrees of perceived success.

One more survey…

The CICA Youth Financial Literacy Study 2011, conducted by Harris/Decima, measured the financial literacy of Canadians aged 16-22. Nine out of ten respondents believe that parents should be good role models for responsible financial decisions.

Do you want to talk more with your kids about money? Do you want to be a good financial role model?

All the literature accompanying the release of these surveys indicated that many parents want to do more to help develop their child’s financial literacy, but are unsure how best to do it. Here’s a few links to help get you started. Look for more posts on this blog about some specific issues around kids and finance.

  • The Canadian Foundation for Economic Education has resources for both home and school to support the frequency and quality of discussions with kids about money.
  • The Investor Education Fund is a non-profit organization founded by the Ontario Securities Commission that provides unbiased and independent financial tools to help you make better money decisions. There’s lots of useful information here, including a section dedicated to helping you teach your kids about money.
  • The Chartered Professional Accountants of Canada host a site with a number of resources geared to helping better financial decision making. Included is a blog by a magazine journalist who journals on some of the topics and issues she deals with helping her own child develop financial literacy.
  • Learning Money with Leo is a free iPad app provided by the Royal Bank of Canada to help three- to six-year olds engage in games and activities related to money.

And if developing multiplication skills is one way your child can move further down the path to financial literacy – we can help.