3 ways to teach your kids financial independence

Have you ever woken up with the night sweats, dreaming that your now 15 year-old-son is 40 and still living in your basement? It wouldn’t be so surprising if you have. Research released earlier this year shows that parents across Canada are still supporting their kids financially well after they graduate from university or college. In Ontario, parents are spending on average $4,135 per year or $345 per month to support their children aged 30-35. While the study showed that 69% of participants were happy to do so, if it’s compromising retirement plans or providing a crutch, it’s probably not the best idea. We spoke to Silvi, KOHO’s in-house financial coach about what conversations parents can have with their kids to avoid forever being the “bank of mom and dad.”

KOHO is a FinTech company that provides Canadians with an alternative to traditional banking. KOHO offers a no-fee everyday spending account with an integrated app, which has features such as automated savings, spending insights, and real time spend notifications. Silvi creates custom plans for KOHO users to tackle their debt or build a budget they can actually stick to.

As the financial coach at KOHO, I often work with millennials who are drowning in credit card debt and feel frustrated by their finances. They want to be financially savvy, but “How to Stay Out of Credit Card Debt” isn’t a subject taught at school (why not is a mystery to me), so they don’t know where to start. If parents can facilitate casual conversations about credit cards, saving and investing, it can be a game-changer for their kids’ future.

Here are three conversations worth having to promote financial independence

Conversation #1: Credit Cards

Did you know that Canadians spend on average $750 per year in interest charges, while even the best cash-back credit cards only return about $480 per year?

Credit cards are attractive for earning perks and points, but are they really worth it?

Here’s how you can help your kids avoid racking up a credit card balance they can’t afford:

  • Teach them what a minimum payment is: The wording of “minimum payment” is deceiving, so make sure you clarify that a minimum payment is the minimum amount you have to pay before your credit score is dinged, not the amount to avoid interest. Teach them that to avoid paying 20% interest, they should pay the balance down in full every month.
  • Encourage use of a debit card for daily expenses: With a traditional credit card, it’s so easy to lose track of expenses and end up with a huge balance at month end. KOHO is trying to help Canadians avoid bank fees and interest, so we’ve built a product that’s like a debit account (where you load money or have your paycheque deposited into the account), but you still earn cash-back. You get real-time notifications and spending insights, so it’s incredibly handy for budgeting. Using a credit card occasionally can be good to build up a credit score, but it doesn’t need to be the primary card used.
  • Teach them to build a “slush fund”: A chequing account in the green can easily turn into credit card debt with an unexpected expense like an emergency car repair. Life happens, so keeping a float of 2-3 months worth of expenses in a separate savings account is an invaluable way to stay out of debt.
    Conversation #2: Savings

    When it comes to tackling debt and saving, time is money, so the sooner your kids can start chipping away at either, the sooner they’ll be on track to financial independence. Generally, debt with an interest rate over ~4% should be tackled before saving starts.

    Here are some nuggets of wisdom to help them out:

    • Check out savings apps: The Goals feature within the KOHO app allows you to set savings goals and automatically contribute on a daily, weekly, or monthly basis. (e.g. save $500 for grad trip in 6 months by automatically contributing $3 per day). With RoundUps you can also round purchases up to the nearest $1, $2, $5 or $10 and put the money into savings. This is similar to a digital piggy bank!
    • Treat savings like a bill: A great way to save or tackle debt is to set up automatic payments from your bank account into your debt or investment account monthly or bi-weekly. This way, there’s no option not to save.
    • Help them see their cash-flow big picture: By the time I left university I had never actually looked closely at my spending and I noticed that all my money seemed to somehow disappear. Simply knowing how much money you have coming in vs. what is generally going out is a huge revelation for many people. It helps you adjust your spending towards things that drive happiness and value in your life, and is a great exercise to do with your kids.
      Conversation #3: Investing

      For every dollar that is put away when you’re 18, if invested at 5% per year it would be worth 10X that by the time they retire. Thanks to compound interest, investing can make exciting events like buying a house or starting a business affordable sooner.

      When it comes to investing, here are the top things to cover:

      • Start by opening a TFSA: Canada’s “tax-free savings account” is a great first investment account for anyone. Investments grow tax-free and money can be taken out any time (unlike an RRSP, where there are rules on what you can withdraw without being taxed). You can open a TFSA at various banks and investment firms. I always recommend that people max out their TFSA before moving on to an RRSP.
      • Determine what investments should go into the TFSA: Savings needed within 1-2 years are best suited for Guaranteed Investment Certificates (GICs) or high-interest savings accounts. If the money is for longer-term (3+ years), you can think about investing in stocks or bonds. All of these investments (except a high-interest savings account) would go inside the TFSA.
      • Help them keep their investing costs low: A few decades ago, mutual funds with a 2% fee were the only option for investing. Today, there are several innovative companies that offer low-cost, user-friendly investing solutions such as:
        • 1. Robo-Advisors are online investing platforms which create a low-cost, diversified portfolios of stocks and bonds for a fee of 0.25% to 1%. After you fill out a survey, the platform will determine the right risk profile and invest accordingly. A Robo-Advisor is a great option for “hands-off” investing. Wealthsimple and Mylo are two examples of Robo-Advisors with offers to get started.
        • Tip: Sonnet readers get $10,000 managed for free at Wealthsimple, and $10 off when you fund a new Mylo account using the code SONNET*.
        • 2. Self-directed trading, also called DIY Investing, is suitable if you want to trade your own stocks, bonds and exchange-traded funds (ETFs). There is no ongoing fee, however there may be a cost per trade or other account fees. Questrade is an affordable, user-friendly option, or all of the Big 5 Banks have their own platforms.

          Summing it all up

          Having conversations about money isn’t always fun, which is why most of us end up having to figure it out on our own. Putting it in the right context (“did you know you can be a millionaire one day!”) or leading by example are usually most effective. I was lucky that my parents didn’t encourage the use of credit cards, but I had to learn about TFSAs and investing from friends in university. University is still considered early for many people, but I wish I had learned earlier. If I had set aside $20 a month and invested at 5% when I was 18, it would have added up to nearly $10,000 by now!


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