Friday, July 8, 2022 / by Mario Daniel Sconza
Summer is here and many high school and post-secondary students have found a job and are diligently working away.... and making wise, well thought out decisions on spending, saving, and investing 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 almost as fast as they make it, you might want to keep reading.
Kids can make a fair amount of money these days ($15+ hourly in BC and ON) and while things are expensive and they should enjoy some of their earnings, there is no reason why they can’t start to manage that money responsibly.
It sounds so cliched to tell your kids, "make saving a habit" and it really is only half the picture (you need to save and INVEST your money) but developing a saving mindset early in life will pay back huge over the course of a lifetime. If you are having trouble convincing your teen that saving and investing is not just for old people, try this example:
If your teenager earns $150/week in 2022 and invests one third ($50) of that money from age 18 to 65 at 6% (the average Canadian stock market return from 1984-2020) they would pile up over $40,000. If they waited ten years and invested the same amount at the same rate, they would have just over half of that amount. Even better, if they opened a TFSA when they turned 18, that $40K would be tax-free. Even if they decided to spend the money on a car or a house long before then, their money would have doubled after 12 years and there is no penalty to take money out of a TFSA.
Chances are your teen doesn’t 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 and famously said, “I bought my first investment at age 11, I was wasting my life up until then.”
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 (needs vs wants) decisions.
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 (try for 30% 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 their debit card, the result is unlikely to be a lot of savings. The remaining 70% goes into their daily spending account and they can use it 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 lots of life lessons we need to teach our kids and personal finance doesn’t always top the list. Half of us also live paycheque-to-paycheque, so our teaching credentials may be a little dubious!