Financial Literacy: Let’s Start Now

Trips to the gas station are becoming more of a financial burden now more than ever before. This comes as no surprise, with the June US Consumer Price Index (CPI) rising 9.1% year-over-year, the highest rate in decades and well above the Fed’s +2% target. FP Canada’s 2022 Financial Stress Index report found that the rising cost of living is leading to significant financial pressure on Canadians, with 38% of Canadians saying money is their biggest concern, outranking personal health(21%), work (19%), and relationships (18%).²

Increasing stress levels among Canadians fosters the need for strengthening financial literacy in an effort to control rising living costs. Research tends to show that most Canadians don’t turn a focus to financial education until their 20s. Unfortunately, a good reason for increasing stress levels is a result of the lack of financial literacy and planning exhibited by many young Canadians today. Starting the learning journey early in life can help to build strong habits and confidence to alleviate some stresses later in life.

In an era where the cost of living has soared, some parents feel like they need to distribute money to help their children’s situation, be it by helping with a down payment, or helping them find a new job. This is true for families of all magnitudes of wealth. They can unintentionally convert several years of dependency of the child into a longstanding need for help. However, instilling good financial habits at a young age is as important as learning basic reading, writing, and mathematical skills.

Successful offspring are often parented by people who instill a strong sense of character and financial wisdom in their children at a young age. Building effective financial habits early on is fundamental in developing the confidence and sense of independence that is crucial later in life. Behaviour development is much easier to achieve than behaviour modification.⁵

How can parents help?

While starting the conversation with your children early is crucial, it’s important to note that the approach will vary depending on the age and stage of your child’s life. Lessons should begin before age seven, as research shows that money habits and attitudes are already formed by then. Below are some common age-specific practices that parents can utilize in helping to foster financial literacy skills in their children:

How can a family office help?

Family offices can be a great resource in helping to shape the financial literacy of your children. Advisors can help to shift the narrative to providing children the opportunity to do things independently, which will ultimately build the confidence and resilience to foster a sense of financial independence from the parents.

In our experience at Northwood, our work with the next generation plays a significant role in the wealth planning of the parents. Families are integrated at every step in the financial journey, with children being encouraged to participate and learn along the way. Below are several ways in which we’ve worked with children in the family to develop strong financial planning habits:

• Money history exercises – facilitating open communication with parents and children regarding the value of money. Parents share their view of money growing up compared to their view of money today. This provides context to the framework of family values and encourages teachable moments from parents to kids.
• Expense management – working closely with each family member every quarter to provide a detailed analysis of their spending, are view of their goals and habits, and an action plan to stay on track.
• Next-Gen workshops – scheduling one-on-one sessions with the children to present common financial literacy topics, including investing, budgeting, income tax, life insurance, real estate, debt, etc.,  as well as being a resource as they navigate the early learning stages of financial literacy.
• Building educational portfolios – helping children get started early by opening their own accounts (or joint accounts), building their own portfolios (i.e., passive portfolios with ETF holdings), and reviewing performance quarterly to encourage participation in financial planning discussions.

We have found that a key factor in raising financially responsible offspring is being intentional in your day-to-day interactions with your children and the message that you’re sending. Personal finance is ultimately a series of decisions to be made, and they can be best reinforced by providing your children with the necessary building blocks and habits to be successful in mastering their financial futures.

‍

‍