The gift of financial literacy

December 20, 2021

Children learn financial literacy by what they see, hear and read. Parents and grandparents are in an ideal position to make a positive impact to their children and grandchildren. At this time of year, it is easy to get caught up in the financial pressures of the holidays – so why not bring up the topic of financial literacy? Share some of those bottled-up financial stories to add some excitement.

When my kids were little I remember watching “A Charlie Brown Christmas” and how it talks about the commercialization of Christmas. When my kids were a little older, we sat down and watched another animation called, “The Story of Stuff”, which deals with production and consumption. We have watched both shows multiple times over the years. One of the best parts of both short shows is that afterwards you can have an open discussion.

To have a little fun on a topic that might not be intuitive for every parent, we have created the financial literacy version of the 12 Days of Christmas, for some helpful discussion ideas.

Day 1 – Financial literacy

On the first day of Christmas my parents talked to me about financial literacy. Instead of spending hours in the shopping malls and shopping online, we talked about the gift of knowledge. Spending time teaching children about financial literacy, a subject that is largely missed in the school curriculum, could be the greatest long-term gift you give them this year. Financial literacy is so important that I wish it would be a key priority in all grades. In my opinion, the children most financially literate are those that have parents and grandparents that have dedicated the time, outside of the school system, to talk to them about money and also lead by example.

Day 2 – Budgeting

On the second day of Christmas my grandparents talked to me about budgeting. They had great stories, Grandpa told us how they saved every penny (what is a penny?) when they were younger. Grandpa said he didn’t buy anything until he had the money in his hand. Grandma said that crumbs made bread and that times were hard. They had to stretch every dollar to make ends meet. One way to show children how budgeting works is to keep track of expenses and show them receipts for the household. Quickly showing them how you budget is important – again, lead by example. Personally, I use an excel spreadsheet and have the main categories of budgeting (i.e. utilities, entertainment, vehicle…). The term, “budgeting” is better talked about in stories but any approach is better than nothing. If children never see or hear about the hard work that you did to get the life you have now, then how are they to know?

Day 3 – Goal Setting

On the third day of Christmas my parents talked to me about goal setting. We all want to tell our children that they can do anything they want in life, if they work hard enough. Like budgeting, sharing some of your own stories of the goals you set when you were younger and how you were able to achieve them can keep their attention. Some of the best days are those early days of sacrifice and hard work that enabled you to reach your goals. Contentment and satisfaction come from within, and early sacrifices can have both emotional and financial rewards. Throughout life there are various goals that may have a financial element. Whether this is education planning, vacations, purchasing a vehicle, or buying a first home. By writing all the goals down, you will be able to prioritize those most important.

Day 4 – Earning Money

On the fourth day of Christmas my grandparents talked to me about earning money. Earnings typically begin by doing small jobs, or possibly receiving an allowance for chores. The sooner the earnings begin, then the easier it is for your children to comprehend the effort needed to make money. The term, “money doesn’t grow on trees” is very fitting when it comes to talking about earnings. In my opinion, teaching your children how to work and contribute to the family is a life skill. To achieve goals that have a financial element you must work and earn money. It is only after they have worked, and earned their own money, that will they fully comprehend the value of money and the effort needed to achieve their goals.

Day 5 – Savings

On the fifth day of Christmas my parents talked to me about savings. Not all people save money the same way. Some people have one general account, while others compartmentalize their savings – like a pool of funds for each goal. When I was 12, I remember having three different bank accounts, one for a travel account, one was a car fund, and another for education. My mind very much compartmentalized things. I had worked backwards from the goals established. In order to purchase a car at age 16, I needed approximately $5,000. With 48 months to save money, I set aside $104.17 into my car fund every month. The same applied to wanting to travel through Europe after I graduated from high school. I added up the cost of the return flight, international hostel, and euro rail pass. Similarly, I was saving monthly into my travel fund. Another goal was to go to university in the United States and I saved money for that but also learned that if I worked hard in school that I could get both academic and athletic scholarships. If your kids do not have a bank account set up yet, opening an account for them is a good start.

Day 6 – Protection

On the sixth day of Christmas my parents talked to me about protection. Protection is really an important discussion item to have with children in this age of electronics and social media. Fraud protection and identity theft are becoming rampant. Teaching your children how to protect themselves is key. Knowing that you never provide your personal information (i.e. birthdates, social insurance number, etc.) when you are not 100 per cent sure the request is legitimate. Explaining the different types of internet scams is a good start to the conversation. It is also important is to ensure that they speak with you if they feel their information has been compromised.

Day 7 – Investing

On the seventh day of Christmas my grandparents introduced investing. One of the main components to discuss with investing is risk management and the importance of avoiding big mistakes. All too often, there is the temptation to take a huge risk as a get rich quick approach. Explaining that investing in solid companies is different from speculating is key. Provide examples of companies that they may be familiar with and may even use the products every day, such as Microsoft or Apple. There are online tools where you can set up a portfolio of stocks for practice and not use your real money. Learning about investments before you have money is the best, so that when you have money you are entering this stage more confidently. In some situations, we have had minor children (under age 19 in British Columbia) that want to start investing with real money. The money to be invested can be from the minor’s savings or it can be gifted from a parent or grandparent. Unfortunately, a minor cannot open an investment account directly in their name. It is possible for parents and grandparents to open an informal in-trust for investment account on behalf of a minor child or grandchild. The nice part of the process of opening the account is the discussion of how to invest the funds within the account. One of the concepts to building up wealth is starting early. Compounding returns and the benefit of time is so powerful.

Day 8 – Spending

On the eighth day of Christmas my parents talked to me about spending. They explained that it is not just how much you earn, it is how much you spend. In my experience, the individuals that I have seen get into financial difficulty had an inability to control what they spend. Having the latest and greatest gadgets comes with a cost.

It can also be the little things that add up too. To illustrate we can use two people, Britney and Belinda, both have the same earnings but have different savings. Britney starts each day with a trip to Starbucks for her favourite coffee. For lunch she will typically go out to a restaurant, either sit down or pick-up. Sometimes Britney will also get a second Starbucks coffee later in the day. On average Britney spends $25 per day on coffees and lunch. Belinda will make a coffee at home, and have a coffee in the office. She also prepares her lunch meal at home. On average, Belinda spends $5 per day on coffees and lunch. On these two little items alone, Belinda is able to save $20 more than Britney every single day. There are approximately 250 working days in a year. By making small lifestyle changes, Belinda can save an average of $5,000 per year.

It is very easy to get emotional when it comes to spending. Have you ever bought anything that you almost immediately regretted? Sharing your stories with your children is a great way to reduce unnecessary purchases. Sometimes spending is learned through experience. Going to a landfill with the children and having them look around at all the purchases that people have made, that are now simply disposed of, is eye-opening. People buying cheap items that don’t last and end up in the landfill is also bad for the environment. The short-term satisfaction of spending can often be followed by buyer’s remorse. As a rule of thumb, the bigger the purchase, the more time you should think about the purchase before buying. Even leaving a store and thinking about the purchase for one day often reduces the unnecessary purchases. When children see parents talking and slowing down the purchase process this is a great lesson. By spending less, you can save more and achieve the goals that are most important to you. Plus, it’s an added bonus that it is also better for the environment.

Day 9 – Borrowing and debt

On the ninth day of Christmas, my parents talked to me about debt. When you don’t have money, and you still want to spend, there are companies that may lend you money. It may be tempting to get promotional deals on short term borrowing. Those short-term deals don’t last. Knowing the difference between good debt versus bad debt is an important financial literacy item to review.

There are several examples of bad debt – credit cards must be top on the list. Over the years I have dealt with dozens of situations where parents are having to bail out their children who got themselves into credit card problems. Before your children even know what credit cards are, I would start advising them of how credit card companies make money. Explain to them that if you are not able to pay off the credit card balance in full by the due date indicated on your statement then don’t do the charge. We recommend pulling out a copy of the charge card account agreement (i.e. Visa or Mastercard) and showing the children the fine print on the interest charges if payments are missed (i.e. 18 per cent). Those that lack financial literacy typically go a little wild when they first have a credit card. It is very easy to charge money on a card. Some spend more during the holiday season than what they make. Excessive spending in the short term may result in having to pay huge amounts in interest charges. Credit card debt is a prime example of bad debt if the balance cannot be paid every month by the due date. To illustrate, we will use a credit card where $2,000 in charges were made. If you only did the minimum payment each month of $60 then the total payments would take 13 years and 10 months with $3,798.88 in total payments ($1,798.88 equals the total interest paid).

Some of our wealthiest clients have borrowed money to purchase a business, expand a business, purchase real estate, etc. In most of those ventures, borrowed money was used in a good way. Teaching your children, the difference between good debt and bad debt is an important lesson.

Day 10 – Access to information

On the tenth day of Christmas, my parents talked to me about financial information. The term, “don’t believe everything thing you read” is truer today then it ever has been. Social media is the number one resource for information for young people; unfortunately, much of the information has very little validity. Up above we talked about protecting. On Netflix they have a great show called, “The Social Dilemma” and it is a great show to watch with your kids. It talks about how information is gathered and how information is fed back through the devices they are looking at (i.e. iPhone, tablet). We highly recommend that you have these discussions and point your children in the right direction with respect to the information they are exposed to regarding to financial literacy.

Day 11 – Understanding taxes

On the eleventh day of Christmas, my parents talked to me about taxes. When you work and have income, you must file a tax return (if you have taxes payable). The purpose of the tax return is to determine exactly how much taxes are owed to the government. Explaining the marginal tax brackets and how income tax is only one of many taxes that you must pay is important. Explaining how property taxes work or excise taxes can provide them with useful knowledge. Discussing what items have provincial sales tax (PST) and what items have federal sales tax (GST) is also a good start. Nearly all services, products, and activities have a tax applicable. Often the price tag that you see on a new item is not the full price. One of the ways that I taught my kids about taxes was showing an example of purchasing items used or new. If you purchase a used item it often costs significantly less, is good for the environment (by repurposing), and you have the bonus of not having to pay sales tax on it – potentially a 12 per cent savings.

Day 12 – Giving

On the twelfth day of Christmas, my grandparents talked to me about giving. Helping others that are not as well off financially is one of the foundations of support needed in a community. Many financial education literacy programs have giving as one of the compartments to allocate your earnings. Throughout life, there are many people who will reach out and request a donation. Donation scams are unfortunately sometimes knocking on your door, calling, or emailing. At many cash registers now, the cashier will ask, “Would you like to make a donation?”. I’ve always told my children to choose the charities that are most important to them and to do their research. Never feel pressured to give money when approached, in fact, always be extra cautious when others reach out to you to ask for money. Like goal setting, we encourage a thoughtful process on dealing with giving. Not all charities are equal and doing research will ensure your donations are allocated to the best charities.

Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC. Call 250.389.2138, email greenard.group@scotiawealth.com or visit greenardgroup.com/secondopinion.

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