It's Your Money  

Teach your kids money

Kids went back to school last week, but unfortunately there is still a gaping hole in the curriculum that they will be taught.

Financial literacy is arguably the most important subject that needs to be taught to the next generation and yet it is still not part of the core curriculum.

Many teachers and even some school boards have taken this oversight upon themselves and at least attempted to offer some coursework in this area but it is definitely not enough.

Until this changes, the responsibility for passing on these financial lessons lies with the parents and grandparents for now.

During the next three weeks, I am going to dive a little deeper into the subject and provide some examples and advice on how you can start the conversations with your teenagers and keep the learning process rolling once you’ve begun.

Spending money is easier than ever now with online shopping and “one click” payments. With today’s teenagers more connected than ever, the marketing and advertising of major clothing and electronic suppliers is continuously pushing them to spend more and more to establish their identity and assert their independence.

When you bring up money issues, teens may look at you like you’re from another planet, but the truth is they really do want to learn more about personal finances; you just need to find the right way to bring the lessons up.

I am going to suggest that step one is to start with a budget. Everyone talks about budgets and how important they are but very few people actually do them.

The first page should contain all sources of income, whether it’s tracked weekly or monthly.

Depending on their age, their income sources might include a part-time job, allowance and/or birthday and Christmas gifts.

While you may be stretched thin yourself, a good-sized allowance will help to formulate the base of many financial lessons and you can “recoup” some of the allowance money that you give out (more on this next week).

The second page of the budget should deal with expenses.

Every penny that is spent should be tracked in the budget whether it’s spent on lunches, clothes, gifts or any number of other items. Just like adults, teens may be shocked to find out just how much they spend eating out or buying snacks over the course of a month.

At the end of each month, you should sit down with your teen and review their monthly budget and see what they have left.

Let’s hope there is some money left and now is the time to make a plan for the remaining balance. Are they saving up for their first car? Looking forward to a class trip out of town?

Set a goal and then work backwards to see how much needs to be saved each month to reach it. Discuss ways to trim the expense side of the budget to boost the amount leftover to put into savings.

When your teens hit college, they’ll be hounded by credit card companies and unless armed with knowledge, can quickly get into trouble with their first card.

For step two, consider getting a joint credit card now with a very low limit, so that you can teach them the basics of properly handling credit while they’re still at home.

In addition to a credit card, you should help them set up a bank account and a separate savings or investment account early on.

Each of these three accounts will help your teen learn the basics of managing personal finances and when the statements come in, provide a great starting point for future lessons.

Attempting to teach financial literacy is an intimidating and often overwhelming project but if you don’t do it, who will? It is never too early to start and if you don’t feel comfortable or capable, consider enlisting some help from a family member, friend and/or your own financial planner.

Keep an eye out for next week’s article where I will further explain my allowance recovery idea mentioned above and discuss the next couple of steps to teaching your teenagers the financial lessons that they so desperately need.                    


Exceptions to the rule

While regular monthly contributions to a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) typically makes sense, those carrying high-interest debt loads will usually be advised to put that extra cash against their debts instead.

Every situation is different, but most of these potential investors in this position will never earn enough investment returns to offset the interest accruing on their debt.

Let me explain.

The average investment account in Canada (based on historical returns of the Canadian stock market index) earns somewhere around seven or eight per cent per year.

Unless these investments are held in a TFSA, this growth is also taxable, which will leave you an after-tax return of around two per cent less.

At the same time, balances held on a credit card are accruing interest at an average rate of anywhere from 10-20% per year. You can easily see why this plan doesn’t make any sense and how much more effective it would be to pay off that credit card debt first and then start your investments back up after it’s gone.

Let’s look at this in another way.

If you invest $1,000 per year and earn a seven per cent return, you earned $70 of taxable growth that year. If you were to take that $1,000 and put it against credit card debt that is running at a 19 per cent interest rate, you would save $190 worth of interest charges.

That means you come out $120 (or 12%) farther ahead and you don’t have to take on any investment market risk to get there.          

You really can’t argue against this basic math but having said that, there are some cases where continuing to invest actually does make sense. So what are they?

The first scenario is for those that are lucky enough to have employer matched contributions to a defined contribution pension or group RRSP.

  • If you were to invest $200 per month and your employer kicks in another $200 on your behalf, you’re already earning a 100 per cent return on your money. Add the seven per cent per year of investment growth and this means that you are earning a 107 per cent annual return which significantly outweighs the 10-20 per cent interest costs you have to pay.

Not all debt is created equal and if you only have “good debt”, you may be better off continuing to invest.

  • The high interest debt I’m talking about above falls into the “bad debt” category but a low interest line of credit or mortgage may not. In this situation, you may be better off to pay down the low interest loan and invest at the same time. A proper financial plan can help you to determine what makes the most sense in your case.

Unless your situation falls into one of the two examples above, there really is no logical argument to be made for continuing to invest until your credit cards and other “bad debts” are paid off.

If you find yourself holding debt on a card or through another high interest loan, take the time to sit down with a certified financial planner professional to discuss your options and make a plan to clear off that debt and get back on the road to financial freedom.    

Don't do anything at all

I saw something in the news last week about a $60 million lottery prize being claimed in Vancouver and it got

me thinking how quickly a big windfall can vanish if you don’t do proper planning.

For those fortunate enough to receive a large inheritance or even a lottery payday, a clearly defined plan can make all the difference in ensuring that the money goes to good use and lasts a lifetime.

Many individuals who receive inheritances or other windfalls squander the money away in the first one to three years with little left to show for it.

A good financial plan can go a long way to help you both enjoy this money now and also improve your financial well-being for the long term.

The first thing you should do when you unexpectedly come into a windfall is nothing at all.

Don’t immediately run out and buy a new car or house and don’t start passing out cash to family or charities just yet. The big winner in Vancouver did exactly that and waited before coming forward.

Instead, take some time to really think about what your priorities are and what you really need or want.

If the inheritance is due to the loss of a loved one, take the time to properly grieve and don’t make important financial decisions while your mind is understandably distracted.

After the shock of this windfall has settled in, it’s time to sit down with a certified financial planner professional and make a plan.

The first step of the plan is to cover off the basics. Make sure you’re on track for retirement, have adequate insurance and you have an “emergency fund” set aside.

From here, each plan will take a variety of paths. You should look to pay off high interest debt, contribute to a child’s RESP, further fund your retirement portfolio, etc.

The urge to go out and buy something new will be strong, so don’t forget to discuss this. Many plans will incorporate a set amount, maybe five per cent depending on the size, which will be earmarked for that new car or a big trip.

A proper financial plan is imperative to ensuring this windfall sets you up for a lifetime of less financial stress.

Without a plan, many treat an inheritance as inexhaustible and just keep “dipping into it” until it’s all gone. Often it’s the larger inheritance amounts that disappear the quickest as people don’t realize they will burn through it until it’s too late.

Immediate taxation is not an issue. The amount you receive from a lottery winning or inheritance is not taxable in Canada. But the ongoing tax must be carefully planned for.

If your financial plan incorporates investing a portion of this windfall and living off the investment returns, you need to structure these investments to be as tax efficient as possible.

This could include strategies such as a spousal loan, inter vivos trust or a family holding company. Once again, these options should all be carefully considered before making any rash decisions.

With a substantial windfall, people will come out of the woodwork to offer their “advice.”

You may get phone calls from family, friends and even complete strangers that are all eager to tell you what to do or sell you on their idea. Take the time to seek out professional advice and don’t feel rushed or pressured to make any decisions.

A little extra planning now can go a very long way to guaranteeing a comfortable financial future.                     

Save money on insurance

Whether it’s being used to protect against lost income, business debts, a mortgage or any number of other reasons, most Canadians will require life insurance at some point.

While the monthly cost for this coverage is typically not that much, cutting even a few dollars off the price can have a significant impact when you pay these premiums for many years.

Here are a few tips to help you get the best deal on the coverage that’s right for you:

Consider paying for your policy annually instead of monthly 

Almost all insurance companies offer a discount for those who pay once per year and this discount, for an average sized policy, is usually around eight per cent which equates to almost one month’s premium!

Quit smoking

Depending on your age, your life insurance premiums will roughly double if you smoke. For example, a policy that would cost a non-smoker $75 per month will cost those that smoke around $150. Over 25 years, that extra premium will amount to an extra cost of $22,500.

Most companies consider you a non-smoker if you haven’t had any tobacco products for 12 months so there’s no better time than now to quit! But don’t wait an extra 12 months before you apply – it’s better to apply now and pay smoker rates for one year and then have the policy adjusted to non-smoker rates when your 12 months is up.

Buy term insurance and skip the permanent stuff

While whole life and universal life (the two main permanent insurance types) both have their places and can be excellent options for the right person, most people really only need term coverage.

Term insurance is far cheaper and you can more easily afford the amount of insurance you really need to provide proper protection. When selecting term coverage, it’s critically important to get the right length of term so that you don’t face a costly renewal.

If you need insurance for 20 years, buy a 20-year term instead of buying a 10-year term with plans to renew it. Terms can be purchased from five to 40 years and can also be bought with a fixed “term to age 65” depending on your needs.

Make sure you shop around

There is no good reason to consider buying insurance from an advisor that works for one specific insurance company or bank. 

No matter what you are told, there is no one insurance company who will have the best price all the time. In reality, each insurance company attempts to even out their books with a similar number of policies for people in each age group and they adjust their prices accordingly.

The company who will have the best deal for you is always changing.

An independent adviser can and should give you a print out that shows every Canadian insurer’s price quote for the type of coverage you’ve decided on. From there you can look at the top couple of quotes and review the features and benefits of these best priced plans.

Purchasing life insurance is not an option or luxury but instead a necessity of financial security for most Canadians.

Make sure you take the time to fully understand the different options out there and select the one that’s right for you.

While you’re at it, make sure you use these tips to get the best possible price.           

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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and will take over as board chairman in June. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations for the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected].

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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