Financial literacy month—November, in Canada— is just around the corner. We have reason to be proud: Canadian youth rank among the top in the world for financial literacy. Every three years, the Programme for International Student Assessment (PISA) conducts a survey among 15-year-old students in 20 countries. In the most recent results, Canada tied for second place.
One key finding of the survey is that students who talked about finances with their parents scored higher. So, yes, parents can make a difference. You can help give your children the basic knowledge and skills to eventually make well-informed decisions about successfully managing their money. Here are some important financial principles and practices a child will find helpful once they leave home and start out.
Know investing basics
Your teen doesn’t need to become an investment expert, but it’s helpful to know a few basics. After all, they can open their own Tax-Free Savings Account (TFSA) at age 18. It’s valuable to understand the power of compound growth, and they can learn a lot just by using an online calculator. For example, based on a 5% annual rate of return, a single deposit of $500 in their TFSA at age 18 would grow to about $5,000 by age 65. This knowledge may encourage them to start saving early.
It’s also important to grasp the different roles stocks and bonds play in a portfolio, and how asset allocation depends on their risk tolerance and when they expect to need the money. Their asset allocation could be quite different if the goal was an emergency fund, a down payment on their first home or retirement savings.
The real test of budgeting will come when a child heads off to university or college or begins working. But there’s a great lesson waiting to be learned under your own roof. Let your child know how a paycheque is divvied up. Tell them everything a paycheque covers, from the mortgage, water bill and education savings to car insurance, investments and charitable donations. Explain wants versus needs—that you contribute to your TFSA to save for a vacation after covering the groceries. Your child will get the picture that managing finances requires discipline, organization and responsibility.
Don’t spend more than you have
Be sure your child understands the dangers of debt. First, paying interest on a credit card or bank loan is like paying more than the purchase price for everything you bought. Also, debt that isn’t wisely managed can quickly spiral out of control. Interest builds on interest, requiring a bigger and bigger amount of the borrower’s income. If you can instill in your child the importance of living within their means, you’ll have done well.
Save for your goals
Your child should know about the pay-yourself-first concept—that, eventually, they should commit a portion of each paycheque to savings. It’s the best way to meet financial goals. Paying yourself first does take discipline, especially when you’re young and may have the urge to splurge. But even a small amount invested regularly is enough to create a habit that will last their entire working life.