Financial Friday 179: Teaching Money Lessons that Last for a Lifetime
Many high school and post-secondary students are diligently working away at part-time jobs.... and making well-thought-out decisions on spending and saving some of their hard-earned dollars. If that sounds like your child, you can stop reading here! On the other hand, if your child seems to be somewhat fiscally challenged and as far as you can tell, spends it as fast as they make it, you might want to keep reading.
Kids can make a fair amount of money these days ($15 to $17 hourly in BC and ON) and while they should enjoy some of their earnings, there is no reason why they can’t learn to responsibly manage their money.
It sounds so cliched to tell your kids "make saving a habit" or "pay yourself first", and it really is only half the picture — they also need to invest their money! Developing a saving & investing mindset in their formative years will pay back huge over the course of their lifetime. If you are having trouble convincing your teen, try this example:
If your child earns $150/week in 2023 and invests one third ($50) of that money from age 18 to 65 at 7% (the average Canadian stock market return from 1984-2020) they would have an extra $60,000 in their retirement fund! Even better, if they opened a Tax-free Savings Account (TFSA) when they turned 18, that $60K would be tax-free. In fact, their initial $2600 contribution would have doubled after just 10 years and there is no penalty to take money out of a TFSA — they could cash out of the market and withdraw the funds anytime they want.
Chances are your teen doesn’t even know what TFSA stands for and would grossly underestimate how much even a small monthly contribution will amount to over time. Don’t worry, this lack of knowledge is completely normal — only 92,000 of the almost 15 million TFSA holders are under the age of 20! Even Billionaire investor Warren Buffett claims he got a late start when he famously said, “I bought my first investment at age 11, I was wasting my life up until then.”
The issue is that investing will never happen without saving, so your teenagers must understand how and why they need to save, be extremely conscious of living within their means, and learn to carefully evaluate their spending decisions (needs vs wants).
Talking your teen out of buying that “must have” $75 t-shirt or $150 jeans can be a challenge, so avoid the situation all-together by getting proactive and have them open two bank accounts. They key is to get a portion (aim for one third in your negotiations!) from any part-time job, birthday cheque or other windfall into a “no-touch” high-interest savings account. If all their money goes into an account connected to a debit card, the result is likely to be little if any savings.
The remaining two thirds of any monies received goes into their daily spending account to use any way they want – it isn’t necessary to earmark it for a purpose or even track that cash if they don’t want to. They just need to know that when the spending account runs dry, there isn't any more until payday rolls around again.
As parents we do our best, but there are plenty of life lessons we need to teach our kids and personal finance doesn’t always make the list. In addition, half of us live paycheque-to-paycheque, so our teaching credentials may be a little suspect!
Resources:
Bank of Canada says interest rates may be at peakBoC Governor says interest rates may be at their peak as inflation falls to 3.1% in October — some economists believe rates could be dropping as early as mid-2024
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