Early in my financial planning career, a client asked me to speak to her children about basic money concepts. I thought this would be a snap. After all, talking about money is my job. The meeting, however, did not turn out as expected. The questions were so basic I didn’t have a ready response. It is one thing to talk about investing with an adult. It turned out to be another thing altogether to talk about money basics with a nine- and 11-year-old. I don’t know who learned the most that night, my client’s children or me.

It’s tough raising children in today’s consumer-orientated society. How do parents educate their children about money when, at every turn, they see advertising designed to persuade them to acquire the next must-have thing?

Good financial literacy is one of the most important life skills we can teach our kids. For good or bad, what and how we learn about money when we are young usually stays with us for the rest of our lives. This learning starts surprisingly early. Children as young as preschool age can learn basic concepts such as counting and working with coins. They are perceptive enough to understand that a plastic card at the checkout or ATM means “money.”

Many children learn most of their financial behaviour from their parents. They are also quick to note their parent’s habits and attitudes. I learned my money skills from my parents who learned theirs from their parents and so on. Hopefully, the parents get it right because bad habits once made are hard to break.

The first step in developing effective financial literacy in children usually begins with a monthly allowance. The common questions seem to be how much, when and the relationship between an allowance and doing chores. There are many thoughts on these questions. A frequent approach is to give an allowance of one dollar a week for each year of age. As the child ages the dollar amount increases. This is, of course, dependent on the family’s financial situation and number of children.

The key to an allowance is that you give it consistently. The parents and children also need to agree on the ground rules at the beginning. These rules also depend on the age of the child and their ability to comprehend basic concepts. Keep it simple early and gradually introduce ideas that are more complex. Another common rule is that a percentage must be saved each month for mutually agreed upon goals. Goals might be as simple as a new computer game to something more complex like education savings. This is also an excellent opportunity to introduce the excellent “pay yourself first” concept. In essence, by regularly saving 10 per cent of their allowance they will be on their way to mastering one of the fundamental concepts of successful financial planning. This is also a good time for children to make spending mistakes. The amounts are small, the consequences are minor and with any luck, they will learn from the experience.

A frequent source of difference between experts, parents and, of course, children is the tying of an allowance to chores. Chores should be something that everyone in the family does freely. It is unlikely that dad will be punished financially if he does not do the dishes. If the child does not take the garbage out, however, they stand to have their allowance reduced as a “teaching” point. Children are quick to recognize a double standard and may decide that the small reduction in their allowance is worth it to avoid the chore. An allowance is a tool to teach money skills, not ensure children complete their chores. A better approach would be offering to pay an extra amount for chores over and above the normal requirements. An example might be washing the car. What a great way to encourage initiative and motivation.

When a child starts to receive an allowance, it is an opportune time to introduce the notion of a bank account. Most, if not all, Canadian financial institutions offer a children’s savings account. These accounts are usually no fee, pay interest and may offer debit card access. The rules and interest rates vary from institution to institution so you need to check around. They can deposit their 10 per cent and over time watch interest accrue, thereby introducing the idea of interest and earning a return. Again, a rule needs to be set on what constitutes a valid reason to withdraw funds from the account. Another learning occasion is introduced if the account offers debit card use. Canadians are the world’s largest users of debit cards, and learning the do’s and don’ts of their use is essential.

Another great teaching opportunity is shopping with your kids. “Take my kids shopping! Are you crazy?” It may sound crazy, but surprisingly, even though we all shop, a large number of Canadians do not have good shopping skills. Having your children help with grocery shopping will introduce important concepts such as meal planning, making a grocery list, looking for bargains and dealing with conflicting wants. Like handling money, effective shopping is a life skill that they will always use. As you move through the aisles, you can discuss price comparisons, expiry dates, healthy vs. unhealthy eating, and nutritional value. Take a calculator and compare items against each other to see how the grocery bill is affected.

Children learn early and quickly. The ideal time to start them on the road to good financial literacy is as soon as they are able to understand basic concepts. An allowance is fundamental in setting them on the road to a happy financial future. Tie in a bank account and shopping and you will have done them a favour they will never forget.

Keith Guinchard is a former financial planner and non-profit debt counsellor who maintains a keen interest in financial issues and their effect on families. He can be reached at keith@keithguinchard.com.