Debt – a word that terrifies Canadians, but fear alone is not enough to motivate smart financial decisions. Arguably, finance management can be significantly reduced by integrating finance 101 lessons early into a child’s education. As the saying goes, “it is hard to teach an old dog new tricks,” so parents need to set up your child towards financial independence by laying the foundation during childhood. November is Financial Literacy Month, so there is no better time than now to start teaching your child how to plan for the future.
Scarier than Debt: The Statistics
Consumer credit, mortgages and non-mortgage loans amounted to nearly $2 trillion in the first quarter of 2016, according to Stats Canada. Household debt has been on the rise for at least the past 26 years, for which BMO Capital Markets has recorded, and it is showing no signs of relenting.
“Parents are the number one influence on their children’s financial behaviors, so it’s up to us to raise a generation of mindful consumers, investors, savers, and givers,” Beth Kobliner, author of New York Times-bestseller Get a Financial Life, told Forbes.
There are a couple of ways to help your kids better manage money, but it essentially comes down to introducing activities that centre on budgeting, saving and goal-setting. As your child become older, your lessons need to transition from short-term to long-term savings and interest. Ultimately, when it comes time to consider post-secondary, financing options like the Registered Education Savings Plan (RESP) is an invaluable solution.
Lay the Foundation with Behaviours and Activities
Managing money effectively is one of the most vital skills needed for security and yet, there is a deficiency in the degree to which it is included in school curriculums. Consequently, youth entering adulthood are often ill prepared and uninformed.
Sadly, a high school diploma or post-secondary degree only gets you so far when it comes to financial literacy. Only 32 per cent of men who attained a university degree were able to correctly answer five basic financial questions (regarding interest, inflation and risk diversification) in a 2014 survey by Stats Canada. The percentage was even lower for women at 18 per cent.
The best way to ensure that your child achieves a high financial literacy score is to introduce certain behaviours and activities at an early age. Interestingly, children as young as three-years-old can grasp concepts related to money management.
Three of the most important financial behaviours to teach your child:
1. Wait before buying something you want
Introduce the idea of waiting and saving for something your child wants, rather than fueling impulsive purchasing behaviour. Create two jars labelled “Saving” and “Spending,” hold your child responsible for some household tasks, and accustom them with the saving-spending dynamic.
2. Set a goal to buy something expensive
Once your child expresses an interest in a new gaming console or a designer jacket, instill in them concepts like goal-setting and savings to encourage them to make regular contributions.
3. Spend only what you have
Taking your kids shopping is an excellent way to introduce price and the finiteness of money. On your next trip to the grocery store, give your child $5 and ask them to find something they want. This behaviour will become especially useful when your kids become old enough to sign up for their first credit card.
Build Something Great with Long-term Savings
Children have a vivid imagination and often talk about their future aspirations – use this as an opportunity to talk about how you are setting a long-term goal to save for their education. A higher education opens doors, but it can sink families into debt. However, having an RESP may mitigate the cost of tuition. According to the Canada Education Savings Program’s “Annual Statistical Review,” more than $44 billion was saved by Canadians through the RESP program by December 2014.
As your child matures, introduce more complicated financial concepts related to long-term savings. By the age of 11 years, begin conversations on compound interest and its role in savings growth and illustrate the concept with real numbers. The next step would be to open a high-interest savings account, which is an excellent way for kids to develop financial know-how in the real world.
An RESP is one of the best way of financing higher education. It is the only way to collect the Canada Education Savings Grant worth of up to $7,200 and income earned is tax-free while in an RESP. In fact, since 1965, $3.6 billion in RESP funds have been paid out by Knowledge First Financial. Keep your children informed about saving with solutions like the RESP.