Financial literacy is essential for everyone, but it is particularly critical for farmers. Defined as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being,” it’s a must in modern agriculture.
Parents agree. They want their children to be financially independent. Yet Stephanie Szusz, who works in agricultural lending at TD Canada Trust in New Hamburg, Ont., meets too many young people who hope to take over the family farm yet don’t have a good understanding of farm financials.
Often the kids have grown up on the production side of the business. They’ve been reared in the field and in the barn, but they don’t learn basic financial terms, how to create a budget, or how to analyze a financial statement, says Szusz.
They end up relying on their accountants or bankers when making financial decisions. But, says Szusz, it’s important that farmers also understand for themselves the rationale at the bottom of the advice they’re getting.
Erich Weber, business finance specialist with the Ontario ag ministry in Guelph, agrees that good financial literacy is needed for success. “You want to do what you love,” he says, “but you need to make sure you can make money so you can still operate at the end of the day.”
Adds Szusz: “Parents forget that financial literacy is a skill you have to teach. Too many young people don’t understand the value of a dollar, how to control their money, or how to make it best work to their greatest advantage.”
New Hamburg, Ont. dairy farmer Marie McNabb started paying her three sons for farm labour, according to their abilities, when they were young. As they got older and took on more responsibility, the pay went up. She feels her children benefited from having their own money to manage, with parental guidance. Some of the money was put away for post-secondary education but the boys also paid for their own hockey sticks, shoes, monthly cell phone charges and, when they started driving, auto insurance.
Co-leading a 4-H club on financial management with Szusz helped McNabb develop her approach to paying her sons. All three of her boys participated in the Financial Fitness club and learned a lot from it, says McNabb. “It was a great learning experience for our kids. At 18 we trusted them to have their own credit cards to start building a credit rating.”
McNabb says paying the kids did require some extra paperwork such as filing taxes, paying workers compensation insurance premiums, and making some source deductions. (Be sure to talk to your farm accountant to find out what’s required in your particular situation.)
So, although it takes time and energy to teach our children about money management, this may be one of our most valuable roles as parents. Whether they choose to farm or pursue another career, those who are financially literate are better equipped to make decisions regarding their savings, consumption, borrowing, and investment choices, leading to happier lives.
Country Guide reached out to Szusz and Weber for more tips on how parents can help children develop good personal and business money management.
If talking to your kids about money seems awkward, says Weber, get over it. Also overcome your awkwardness about including your children in the decision-making discussions such as whether to buy a new tractor, for example.
It’s particularly important for parents to have discussions around the carrying costs of debt, says Weber. These discussions should include the differences between good and bad debt, and the range in interest rates for various kinds of credit such as mortgages, short-term loans, and credit cards. “It’s important to be mindful of interest rates,” says Weber. “Interest charges on credit card debt can rack up fast.”
Getting a credit card with a small limit can be a good way to build up a good credit score for people who will pay it off every month, says Szusz, although she cautions that credit can be dangerous for some people. “If you’re not responsible, then it could have a negative effect.”
Bringing the kids along to meetings with the banker so they can “see what it means to interact with a banker and see what the bank is looking for,” is another way to help the next generation develop the necessary skills for future success, says Szusz. And she suggests setting up a meeting with a personal banker so kids can learn early about the benefits of compounding interest and understand what’s needed to get a mortgage.
In addition, parents can take advantage of the financial literacy educational materials offered online by many financial institutions, adds Weber, who also recommends that parents encourage their kids to take business and accounting courses in high school and university, even if not required.
Youth business entrepreneur programs such as those offered by government economic development agencies are another way to help stimulate an understanding of finance. These programs often have a mentorship component which can help expand your child’s horizons and provide fresh ideas, says Weber.
If the farm has the cash flow, Szusz suggests parents pay kids something for their labour and then guide them in spending and saving their earnings. “They can learn by experience. Let them practice when they are under your roof so you can walk them through the good and the bad,” she says. “Give them the tools and knowledge to face these decisions when they are out on their own.”
Sample budgeting exercise for teens
A budget is a plan that helps you manage your money. It can help you balance your income and expenses while helping you reach your financial goals.
Before you create a budget, think about your financial goals. Are you saving for post-secondary education? Travel? To buy property or a share of the farm?
For a month or two track all of your expenses so you can see where the money goes. Divide your expenses into two categories: “needs” and “wants.”
To be prepared for unexpected problems, set aside some money (i.e. enough to cover three to six months’ expenses) in an Emergency Fund.
Now you are ready to create a personal budget by entering estimated income (don’t forget to subtract deductions), plus expenses that have to fit into the budget such as car payments, gas, mobile phone, saving for college. After the necessities have been accounted for, the rest is discretionary spending which can be used to help you reach your short- and long-term financial goals.
If giving is part of your financial plan, consider how you can make a meaningful impact through your financial donations.
You’ll find more information on how to create a budget on the Government of Canada website.
- 4-H Ontario: Financial Fitness Project. This club provides a hands-on approach to help young people develop good financial management skills.
- Financial literacy educational materials are available from the federal Financial Consumer Agency.
- Farm Credit Canada glossary of financial terms.
- The Wealthy Barber — Everyone’s Commonsense Guide to Becoming Financially Independent. In this book, author David Chilton uses an entertaining story featuring his barber Roy as the backdrop to explain a commonsense approach to financial planning.