Great graduation gifts needn’t cost you much. Smart-as-a-whip grads may have earned straight ‘A’s, but did they learn anything about managing money? You can help them start a post-grad program of financial literacy and competency.
Graduation season is coming and many parents and grandparents are seeking gifts to give to their children and grandchildren.
For the long term, some think about bequeathing assets to their children and grandchildren. Other parents and grandparents plan to die after spending that last nickel. After all, they worked hard for their money—the next generations can do the same.
In fact, some think it’s best for the character of their children and grandchildren to let them make it on their own, rather than just having it land in their lap.
Some parents and grandparents may also harbour dark thoughts that any bequests they leave behind will eventually be squandered by loafing spendthrifts, alcoholics, drug addicts, compulsive gamblers or even cultists. After all, these people don’t all start out on the wrong side of the tracks.
Help build RRSP contribution room
But there are great gifts that parents and grandparents can give without risking large amounts of cash. For instance: RRSP contribution room, now that it can be carried forward indefinitely; student contributions to their own Registered Education Savings Plans, if they lack one; and financial literacy. Even better, these gifts needn’t cost you a cent.
The fact is, even children under the age of 18 can build RRSP contribution room—whereas they cannot open Tax Free Savings Accounts. Your children or grandchildren only need earned income. This could come from delivering newspapers, shovelling snow, cutting lawns, raking leaves and so on. Many teenagers earn money from, say, working in a restaurant or doing paint jobs.
You should help your children and grandchildren file income tax returns. This will teach them how to file (either electronically or in traditional paper-based returns). More important, it’ll create RRSP contribution room. Since it’s unlikely that your children or grandchildren will belong to a pension plan, the income will create contribution room equal to 18 per cent of their earnings.
Filing income tax returns is unlikely to cost your children or grandchildren anything. The chances are, they’ll earn too little to incur taxes.
You should be able to convince them to save 18 per cent of their income in an RRSP. A friend told us that her mother invested some of her earnings when she was a teenager. Our friend didn’t even know what the money was invested in.
Children have time on their side
Your children or grandchildren can likely profit for decades. Consider, for example, a 16-year old. Let’s say that he or she earns interest from bonds at an average rate of 6.5 per cent. (From 1939 to 2004, Canadian bonds generated average returns of 6.5 per cent.) In this case, a dollar invested today would turn into $31.93 by age 71—when individuals must de-register their RRSPs. Let’s also say that the child earns $3,000 from a summer job. Take 18 per cent of that, or $540 ($3,000 times 0.18), multiply that by the $31.93 and the money eventually turns into $17,263.80.
This will, of course, put your child or grandchild on the right financial path. More important, he or she will learn about the magic of compound interest. Your children or grandchildren might decide early on to make their money work for them.
Your children or grandchildren can also contribute to their Registered Education Savings Plan, or RESP, if no one else will. They’ll receive a government grant of 20 per cent up to a maximum of $500 (on contributions of $2,000). RESPs, however, are likely to prove a hard sell to children.
Teach them basic financial literacy
One other gift parents and grandparents can give is knowledge accumulated over a lifetime. True, children and grandchildren rarely want advice from ‘really old people’. But they likely know that money is important. As a result, they might be willing to acquire some financial literacy.
One source of financial literacy is the Investor Education Fund. It bills itself as “Canada’s unbiased non-profit source for information and tools that help consumers make better decisions when investing and managing their money”.
This is an edited version of an article that was originally published for subscribers in the March 1, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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