Financial Literacy Starts at a Young Age
Establishing good financial literacy starts at a young age. To help clients with educating their children and grandchildren about money, I have put together a list of key ways you can get them started. Here are six things that young people can do to develop the necessary financial literacy skills that will carry them through to adulthood.
I think it's really important that we empower young people with financial literacy so we can positively mold their relationship with money and their confidence and their ability to manage it. - Jamie Powell, CFP®, EPC, RRC
6 Ways to Establish Financial Literacy in Young People
- Create a budget. Budgets can be very simple, the key takeaway is to stress the importance of making sure that their expenses aren't exceeding their income. This is something that they can start working on as soon as they start receiving an allowance.
- Develop a savings habit. The sooner you create this habit the better. The younger the age, the longer you have to build. Teach them how to dedicate a portion of their income by setting aside 10% of their paycheck (or allowance or even monetary gifts in younger years). Put this into a different account. You can even help them set up a preauthorized contribution if they are receiving a direct deposit on a regular basis. Talk to them about what this money is for and get them thinking about the importance of setting up an emergency fund for a day down the road when they might need access to some of this money.
- Use credit wisely. The next item to address is credit and how it works. It's really important for young people to understand credit and credit cards. These tools are something of a double-edged sword. They're valuable as they can help you build a credit history. But, if you don't pay off your balance every month, you're going to be paying interest which can quickly spiral out of control. In an age of online purchasing, stores offering payment plans and businesses deferring payments it is crucial for young people to learn early on the potential dangers of accessing credit.
- Understand income tax. Oftentimes with young people, they're not really paying any income tax as they are under their personal exemption. It's important for them to understand that all of the income they were receiving might not necessarily be all of theirs. Many people do their own income tax through software programs such as TurboTax. This is a great opportunity to involve your kids, have them sit in on those conversations and show them how this all works. This will be extremely beneficial down the road.
- Learn about investment vehicles. Knowing the different types of investable accounts or vehicles that are out there is crucial for maximizing long-term gain potential. Talking to them early about the benefits of an RRSP or a Tax-Free Savings Account. Maybe a high-interest savings account would work for them, the key is to avoid leaving their money sitting in a bank account earning 0% interest. The more we can talk to our kids about these things at a young age, the more valuable as it plants a seed for their future.
- Be an investor AND a saver. It's important to be a saver for your day-to-day expenses as well as for your emergency funds. But it's really important to get that money working for you. Kids are like sponges, so to talk to them about this early and talk about it often. This is so powerful that the sooner you get this money growing and working for you, the more it will grow for down the road. It's important to talk to a trusted adviser to find out your risk tolerance, what you're comfortable with and to find the ins and outs of all of these different pieces.
Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn't pays it. - Albert Einstein
These are six areas that are vital to any young person who really wants to get ahead. Financial knowledge empowers them to build good habits and make good decisions moving forward.
If you're looking for more information on how to talk to your kids about money please reach out to us to arrange a call. Or click here to access free resources on Money and Youth.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Jamie Powell is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant.