This article has been updated from a previous version.
Your teen is growing up in an age of instant gratification. Clicking a button can result in a box on the doorstep the next day, without the “pain” of removing money from a wallet.
Worse, as they scroll endlessly through their social media, they see the carefully curated lives of everyone from their peers to celebrities — people showing off their hauls, enjoying trips, or flaunting high-end goods and luxe accommodations.
Let’s just say there aren’t a lot of TikToks made about going into debt.
Even before the COVID-19 pandemic-related financial hardships, younger people were going into debt in Canada in increasing numbers. And it’s not just consumer spending; they face skyrocketing higher education and housing costs, among other things.
Teaching your kids good financial habits is one of the most important life skills you can impart.
- How to talk to your kids about money
- Bank accounts
- Long-term goals and investing
- Credit cards
- Jobs in a traditional and digital economy
How to talk to your kids about money
Most people don’t like talking about money. But helping your child be realistic about where it comes from, how hard it is to make and easy it is to spend, and how to think about the long term is an investment in your child’s future.
Hopefully, you have started the process by helping them learn about money through tools like an allowance or even a student bank account.
When your child becomes a teen, they are ready to gain a more sophisticated understanding of money, mainly because this is the time when it is appropriate for them to start making more independent spending decisions — possibly earning money outside of an allowance.
It may be time to start showing them the family’s budget and talking about your financial successes and mistakes.
This is also the time to get them thinking about how they will pay for the kind of life they want as they move into independence. Want to be an artist? Great! Here’s how much an artist makes, and here’s how much average living costs are in your city.
Talking about money management and longer-term goals is not a one-and-done deal. It will be an ongoing conversation and, more importantly, will require practice.
Parents have different philosophies about allowance. Some prefer the child to earn it, while others may give it regardless of effort, or opt for a hybrid approach. And how much to give is also an individual decision. One money coach suggests a formula of $1 per year of age per week.
With older teens, some parents move from a weekly allowance to giving their kids a more substantial chunk of money monthly or seasonally for items such as clothes. Some parents expect older teens to pay for things like phones and car insurance, while some offer to share the cost. Others see those expenses as necessities they pay for out of the household budget.
Regardless of which method you choose, the point of an allowance is to help children budget, learning from mistakes before the stakes get higher.
One of the basic building blocks of money management is knowing how much one needs by budgeting.
Whether they use a piece of paper, an Excel sheet, or one of the many financial apps, budgeting helps teens come to grips with the idea that money is finite.
Budgeting also helps kids with the essential soft skills of goal setting, planning and decision making.
The 50-30-20 rule is a guide for putting their money in different buckets: 50% on needs, 30% on wants and 20% on saving for the future (this formula can also encompass charitable giving or investing in a business your child wants to start).
Should your child have a bank account, and if so, what’s the right age?
Of course, it depends on your teen’s level of maturity. But moving from a piggy bank to a bank account can teach even younger teens about financial concepts beyond saving and budgeting. A bank account can also teach teens how financial products work, growing their money through interest, and the limitations of low interest rates and alternative ways to save for the future.
The idea is to find tangible ways for your kids to manage their money; doing is almost always a better teacher than listening to lectures.
But there are several questions to ask when shopping around for a bank account for your teen:
- How much interest will they earn? Some accounts for teens offer no interest.
- Are there fees, such as for Interac e-Transfers or debit transactions?
- Is there a minimum balance required?
- Does the bank automatically roll the child over into an adult account when they reah a certain age (potentially with fees and interest rates you don’t want)?
Generally, a savings account is more suitable for a younger teen to encourage saving. Whereas teens who will be using the account to spend money, or deposit earnings from a job or business, may be better off with the addition of a chequing account or a student account.
Some people opt to open a couple of different accounts for their kids to easily track the different buckets.
Online banking will allow your teen to track their spending, savings, and account growth.
Long-term goals and investing
Some things your child may not care about as a younger teen but will become critical as they finish up high school include paying for higher education and saving for goals, such as a down payment for a car or first and last month’s rent on an apartment. And even though the last thing they will be thinking about is retirement, teaching them the habit of putting aside a certain amount of their earnings early on will pay huge dividends later in their lives.
High-interest savings accounts
One option for longer-term savings goals is to open an adult high-interest savings account for your child. These often offer higher interest rates than standard savings accounts, providing a higher growth potential.
One way to get an older teen excited about saving for the future is to gamify it through investing. There are practice investing accounts that don’t use real money but allow your teen to see how investing works, get skin in the game and especially understand the critical role of compounding, where you get growth on your growth.
It also makes sense to get an early jump on leveraging the growth potential of compounding. Though financial institutions don’t allow minors to open an investing account, you can open one for your child and give them a small amount to experiment with if they don’t have enough earnings.
Tax-free savings accounts
When your child hits 18, they can open a tax-free savings account (TFSA), as long as they have a social insurance number. This allows them to invest in products such as equities that can return more than the interest rates available with bank accounts. It also allows them to grow their savings tax-free. The earlier they start, the more growth they can realize through compounding. Of course, higher returns bring more risk; but you can choose lower-risk equities, such as balanced funds.
If your children have not earned enough to contribute the maximum of $6,000 a year to a TFSA, as is likely, consider gifting funds to start them on a path to long-term savings. Consider it an investment in their future not only through the growth potential of compounding but also through the precious gift of understanding how savings and financial products work.
Another tool you can use to instruct your child about personal finances is a credit card.
Teens can’t get their own until they are the age of majority in the province or territory they live in, but parents can co-sign for one or add their child as an authorized user on their account. Caution: parents are responsible for their kids’ outstanding balances or missed payments, with any adverse effects on their own credits scores that entails.
Another option is getting your teen a prepaid credit card, which you load funds onto, but these work more like a debit card and do not help build a good credit score. Therefore, there are pros and cons to getting your child a credit card.
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Using a credit card can teach your teen concepts like interest, billing, and minimum payments. Credit cards also often come with purchase protection, security features and may have rewards points that can be redeemed for things like cash back or travel.
Promptly repaying the balance on a credit card also helps your child develop a good credit score. However, it is wise to call your credit card issuer in advance of adding the authorized user and confirm they report authorized user information to the credit bureaus. If they do not, it won’t help build your child’s credit history.
This will give your child a leg up when it comes a time, later, to qualify for things like loans, mortgages, and other credit cards in the future.
The key is a good credit score, though.
Credit cards make it easy to spend beyond your means, and the high interest rates mean your child can dip into debt very quickly. Not paying your bills on time creates the opposite of what you want: a bad credit score.
Here are a few simple tips:
- Start with a low credit limit for the card your child uses or lower the credit limit on a shared card until your teen demonstrates responsible habits.
- Make your child aware of insecure websites and why they should never input their credit card number or make financial transactions over public Wi-Fi (this is also important for online banking).
- Help your child review statements to make sure there are no suspicious purchases and keep on top of payment deadlines.
Jobs in a traditional and digital economy
As kids start to earn their own money, parents can still play a role in helping them develop good financial habits with their earnings.
It is tempting for many teens to spend all their disposable income on things they want immediately. But helping them get into the habit of paying themselves first (i.e. saving a percentage of their paycheque for the future) will become critical for their working lives. In 2019, only about two-thirds of Canadians had emergency savings to cover three months’ worth of expenses.
However, many Canadians found themselves saving more during the COVID-19 pandemic, although not all. As a result, the average savings rate jumped from 1.3% in 2019 to 14.9% in 2020. And, according to a national survey conducted on behalf of Scotiabank, 61% of Canadians with extra cash found themselves building up an emergency fund.
A good rule of thumb is to save at least 10% of every paycheque, with at least three months’ worth of living expenses covered in case of a job loss or emergency.
The traditional, time-tested jobs for teens — babysitting when they are younger and fast food or retail positions when they are older — help them not only earn money but learn the importance of responsibility and the soft skills of working with others.
But today’s economy means a growing labour gap among young people, with more of what were traditionally entry-level jobs being filled by older people or disappearing due to automation. And, of course, the social distancing constraints under the COVID-19 pandemic will further limit what teens can do to earn money.
You may want to introduce the idea of entrepreneurialism early, whether in the bricks-and-mortar or digital economy. Young people can start businesses that range from selling their creative designs online to starting a dog walking service.
Managing personal finances is a lifelong learning path as people move through different life stages. Starting early with the basics gives your child the gift of a solid foundation for moving through increasingly complex matters, such as taxes and insurance, as they mature.