Financial Friday 168: Back to Class Money Management Advice
As adults, we all know the importance of managing money wisely and the impact our financial situation has on our overall well-being. As parents we do our best to teach our kids about money, but there are plenty of life lessons to teach and personal finance doesn't always make it on our list.
Some high schools and post-secondary institutions now offer financial literacy programs, but which financial lessons, habits, and tactics should parents try to instill on our teenagers, especially if our own money management skills may be lacking?
Wants vs needs & cost vs value
Regardless of age, everyone needs to clearly differentiate between wants and needs and prioritize what we spend our money on. For young adults in particular, value and cost are two more important concepts they need to understand. The latest model iPhone or a carbon fiber mountain bike will really impress their friends, but a cheaper version may perform very similarly and provide a lot more value, especially given the limited amount of funds they have.
Our youth are bombarded by marketing messages, and they need to learn how to avoid hype and be objective, so they can make smart financial decisions. There is a reason plenty of rich folks (even billionaires like Warren Buffett) drive basic cars – it’s all they really need. If your teen wants the latest and greatest must-have item, challenge them to explain the value beyond being new, trendy, or fashionable. When they want to buy something, encourage them to research the product, read reviews, and compare prices to make informed decisions.
Introduce basic investing concepts
Introduce your teens to basic investing and the concept of how to make money with money. Explain how investments can grow over time and the power of compound interest. Should you buy a stock (or an ETF, GIC, mutual fund or some other financial product) for a 14-year-old… absolutely! There are lots of kids out there with parents who invested the time to explain shareholding and how it works at a level they can understand.
Kids are very familiar with many publicly traded companies like Disney, Roblox, Mattel and McDonalds. Holding a few shares (in an informal trust account or simply in your name) may not return enough to put them through college, but it will teach them the basics of investing, risk, and return for managing their finances in the future.
It’s true that a savings mindset developed early will pay back steadily over the course of a lifetime. However, developing an investing mindset from an early age will pay back HUGE over the course of a lifetime and set your kids up for long-term financial security and wealth building. As soon as your kids turn 18, have them open a tax-free savings account (TFSA) and invest the funds, even if they can only muster $50 or $100 monthly to contribute.
Check out our webinar on August 15 for a review of Rich Dad Poor Dad, the one book parents have been recommending to their kids for over 25 years to drive home the power and importance of investing.
Teach the bad (and good) about credit and debt
Credit is very easy to access these days and first-year post-secondary students are often able to get a credit card. Responsible use of this first credit card can help establish a credit score and they are very convenient — almost a necessity for some online transactions. On the other hand, easy access to credit cards (with generous spending limits and 20% interest!) and a few spontaneous or poorly thought-out spending decisions can derail a future before it even gets started.
Failing to understand the impact and obligations of a student loan can also lead to a nasty surprise when it comes time to repay that money or get a car loan or mortgage down the road. Although federally issued Canada Student Loans are now interest free, provincial student loans may still carry interest. Either way, your kids need to realize that a student loan isn’t free money and paying it back isn't an option..... it will definitely crimp their post-graduation lifestyle.
Remember that financial education is an ongoing process. Encourage openness about money and create an environment where your children feel comfortable discussing money matters with you. Starting to instill good money habits from an early age and being a supportive resource as they develop their financial skills will help your money-savvy kids grow into financially responsible, money-savvy adults.
Resources:
Warren Buffett says the most critical investment lies within ourselves
He is often called a sage or the "Oracle of Omaha" when it comes to his understanding of financial markets, but Warren Buffett's best advice for making it big has nothing to do with analyzing stocks or digging into current economic trends.
The Retirement Hub
This Government of Canada website is actually a great resource for planning your retirement with plenty of easy to understand information and real-life examples, including all the details and some helpful guidance about CPP and OAS.
Personal finance expert on how to slash your month expenses ASAP
Straight-up, practical advice from Canadian personal finance guru Kelley Keehn in this 7-minute video on what you can do right now to alleviate some financial stress.
Canadians working past retirement, but not because they want to!
Canadians aged 55 to 64 are not retiring as they carry more debt into their later years and inflation chips away at retirement savings, and government pensions can't keep up!
All 10 provinces ranked according to affordability
An interesting look at what you may already know, but this easy read has some great data including income-to-expense ratio, cost-of-living, household income, home prices, and the current unemployment rate. Scroll to the bottom of this article to see a similar comparison for affordable Canadian cities.