Financial terms and concepts can be complicated, but preparing your kids so that they understand what things like compound interest and cash flow are by the time they're 18 is crucial to ensure that they have the technical understanding to make good choices around money.
So, how do you teach a four-year-old about collateral? You don't! Helping kids learn financial terms at age appropriate times helps make those terms feel relevant to them and therefore stick in their heads.
So, how do you know when to teach kids about different financial words and how do you do it in a way that makes them relevant to your children? We give you tips for teaching kids about financial terms at any age:
Ages 3 to 7
At this age, you can teach your kids the basics about financial terms. Here are some terms to teach them and some suggestions around how to do it.
Terms to focus on:
- Bank Account
- ABM (also known as ATM)
- Credit Card
- Debit Card
Kids are curious about what adults are doing and how the world works. Use that to your advantage by talking to them about how you pay for things. That's a good way to help them understand what credit cards, cheques, debit cards, and money are. You can also use shopping or going out for dinner as a way to teach them about tax by pointing out the sales tax on your bill and how it's calculated.
Getting money from the automatic banking machine (ABM)? Explain how the ABM isn't a money machine, but gives you access to the money in your bank account. Take your kids to the bank with you or open up a bank account for them. Teach them the difference between a savings account, where you put money you don't intend to use right away and can earn interest on, and a chequing account, where you put money you'll be accessing more frequently. You can do this by giving them two piggy banks to separate their money into or setting up two types of banks accounts for them. Help them make their first deposit and tell them what happens to their money once it's given to the bank. Tell your kids the importance of saving for the future and help them budget and save money for something big that they want to buy.Telling your kids what each term means multiple times and then including them in future conversations is a great way to help kids feel confident in their understanding of these terms.
By incorporating your lessons into your life and taking advantage of your children's curiosity at this age, you'll be able to teach them a lot without it ever seeming like a lesson. You can even make it a game by quizzing them every so often and giving them a treat for every term they remember.
Ages 8 to 12
Now that your kids know the basics, they'll be able to understand some more complex financial terms. Leverage what they already know to deepen the lessons:
Terms to focus on:
- Disposable income
- Financial advisor
- Financial goals
- Interest rate
Once again, making as many of your lessons an extension of your life is a great way to teach kids about these concepts. For example, talk to your kids about your income and debt when you sit down to pay your bills. Tell them how credit works when you buy a new car and take out an auto loan.
Get into a car accident or need to make a home insurance claim? Tell them what insurance is, how important it is to have, and what an insurance deductible is.
You can take your kids with you to your financial advisor and talk to them about investing and your financial goals then have them set medium- and long-term financial goals themselves. You can even suggest they add money to their Registered Education Savings Plan (RESP) if you've set one up for them, and explain to them how RESPs work. You could have them do chores around the house and put some of that money aside for them in their RESP. If they're interested in investing, consider buying them a savings bond or a stock for their next birthday and including a lesson about interest and interest rates when you explain to them what it is.
Are you moving? That's a great opportunity to explain to them about leases, loans, mortgages, and rent. Did you get a phishing e-mail? Talk to them about fraud. Take every opportunity to fit in lessons about financial terms.
Ages 12 to 15
Your child might not be thinking too much about financial terms at this age, but helping them learn some important ones during this period is critical. One fun way to encourage these kinds of conversations might be playing financial board games like Monopoly.
Terms to focus on:
- Compound interest
- Credit score
- Emergency fund
- Financial plan
- Mutual funds
- Net worth
- Tax deductible
Now that your child is getting older, it's time for more complicated lessons – which will take more creativity from you around how to teach. If they get a part-time job during this period, that's a great time to teach them about things like an Registered Retirement Savings Plan (RRSP) since they'll be able to start contributing to it. That's also a good opportunity for a casual lesson on things like diversification, risk, assets, stocks, mutual funds, compound interest, Tax Free Savings Accounts (TFSAs), and net worth. Not sure how to get all that in? Talk to them about it while you're driving them to soccer practice or band rehearsal. You have a captive audience when you are all in the car.
You'll also be able to help them do their taxes and talk about what's tax deductible. Share more about your own financial plan during this time to help them create one themselves for any money they're earning now and their future. Explain to them things like bankruptcy and equity by talking about companies that are in the news for going bankrupt and talking about how homes build equity you can borrow against. There's no need to go into great detail on any of these things. You're not teaching a university level economics class. It's just important that they know what these terms refer to so that if they come across them in the future, they'll have a sense of what they mean.
Ages 16 to 18
Now is the time to make your lessons more sophisticated. Your kids will be able to start taking out loans and investing on their own once they're 18. It's critical that they have the knowledge and terms they need to understand how best to navigate their financial life. Follow these tips:
Terms to focus on:
- Annual Percentage Rate (APR)
- Brokerage account
- Capital gains/losses
- Credit vehicles
- Credit report
- Grace period
- Investment vehicles
- Mutual fund
Because your kids are getting older and these conversations are starting to be relevant to them and their lives, you can talk to them about financial terms in practical ways. For example, if you helped them set up an RRSP to start investing a portion of their part-time job earnings, you can talk to them about managing a self-directed brokerage account and what investment vehicles, bonds, mutual funds, diversification, dividends, and capital gains and losses are.
If they are planning to get a credit card when they turn 18 or take on student loans, that's a great opening to chat with them about what APR, a credit report, a grace period, collateral, credit vehicles, foreclosure, and principals are.
If they are saving up for their first car, this is a great time to discuss how to budget for all the costs that come with it.
Kids might be more receptive to learning these particulars at this age. They might even be willing to read a primer on financial literacy aimed at young adults so buy them one for their birthday. Even if they don't read it right away, they can consult it when they need it in the future.
The family that learns financial terms together, meets its financial goals together
Financial terms are complicated and hard to understand for kids but also for adults. It's understandable that you might need to do a bit of reading up before you are ready to teach your kids about many of these terms. It's also fine if your kids don't seem like they're paying attention or aren't that enthused about learning about these concepts. If you connect the lessons to practical parts of your life as you're living it and give them relevant examples, some of what you're saying is likely to stick and that will help them later.
Teaching your kids about money might not be the most fun you'll likely have together – but the lessons they learn might be some of the most important you pass on.
You've got this — and soon they will, too.