Teaching your children to manage money
Today’s youth may prefer to pick up information online, but when it comes to learning about financial life, parents still have some influence. Here are a few teaching moments.
Younger ages
One day your children believe money comes from the tooth fairy, and later discover they’ve got to earn it. Quite a journey, and you’re the guide.
Lessons from allowance
Allowance gives you great flexibility to teach any lessons of your choice. When children are in their tweens, you could tie allowance to either doing household chores or completing special tasks, so they gain an appreciation of work. If allowance is regular spending money, children can learn to budget their dollars until next payday or choose to save.
Communicate with your children
When you share financial information, your tweens or teens can learn a lot about the financial world. Tell them about your mortgage payments, explaining the concept of principal and interest. Teach them about the Registered Education Savings Plan (RESP) that’s in their name. Show them the water bill and tell them water’s not free.
Consider a debit card
During high school, a debit card can be an effective tool to teach children about money management. If the funds are the child’s own earnings from a part-time or summer job, she or he may develop an appreciation for spending on needs versus wants. If you’re funding the debit card, you have an opportunity to teach your child about sticking to a budget.
College and university years
These are the bridge years, when your child assumes greater financial responsibility, but remains very much in the learning stage.
Keeping a budget
Using a budgeting app could be an effective way for your child to get started on tracking expenses. All that’s needed is a monthly report of where money was spent by category – including food, cell phone, transportation, education costs, entertainment, rent, and others. This report might show that financial life is on track, shed light on expenses to be cut back, or demonstrate the possible need for more funding.
Investing basics
If you have your child open a Tax-Free Savings Account (TFSA) upon reaching 18 (or 19 in British Columbia, Newfoundland, New Brunswick and Nova Scotia), you can gift funds that your child contributes. Ideally, the arrangement is that your child learns some investment basics in return for the gift, either from you, or online, or you can ask us to help out. The basics would be to acquire general knowledge of stocks and bonds, risk, diversification and time horizon.
Filing tax returns
Your child isn’t obligated to file a return unless tax is payable but filing offers several benefits even if your child has little or no income. Filing enables the student to claim the tuition tax credit to use now or carry forward. At 19, your child may qualify for the GST/HST credit, payable four times per year. Reporting income creates Registered Retirement Savings Plan (RRSP) contribution room to use later. If income tax was deducted from paycheques, your child may receive a refund.
Managing money is a learning process, so don’t worry if your children make a mistake or two along the way. Praise them when they’re doing well, and encourage your children on the path to becoming financially responsible.
Credit card do’s and don’ts
College and university students may encounter credit card sales representatives on campus. Students can get their own card at age 18 in Alberta, Saskatchewan, Manitoba, Ontario, Quebec and Prince Edward Island, and at 19 in other provinces. If your child follows these guidelines, hopefully the card won’t be seen as free money.
The do’s:
- Aim to limit purchases to what you can pay at the end of the month, to avoid interest charges.
- If you’re unable to pay the entire balance, at least make your payment on time.
- Keep track online of what you owe to avoid an unwelcome surprise at month’s end.
The don’ts:
- Don’t continually make only the minimum monthly payment as this practice can lead to a debt you find insurmountable.
- Don’t treat your credit limit as an allowable amount to owe – the goal is to spend wisely, not spend whatever you can.
- Don’t use your credit card to withdraw cash because interest charges begin right away.
