It’s Never Too Late To Teach The Kids About Money

We all want our children to have a decent life, be comfortable and grow spiritually, mentally, physically and financially. Sadly, schools are dropping the spiritual teaching and never had the financial teaching in the first place. But what financial information do children need as they get ready to run their own farms or personal financial affairs?

The answer to that question might vary a bit but I will give you my thought on what children need to know or should know or I hope they know sooner than later.

AN UNDERSTANDING OF TRUE COST

One of the biggest financial “awakenings” among our children was when they figured out what that thing, whatever it was, cost in terms of minutes or hours of work. Let’s take that $10 lunch. Of course, I’m not saying you and I and our children should stop having lunch. I am saying that a child, well everyone really, should understand how many minutes they have to work to make $10 ($11.30 with tax) after taxes to pay for that lunch.

Let’s do some quick numbers. Say a person is earning $12 an hour. He or she is in the low tax bracket but still deductions come off for income tax, CPP, EI, maybe union fees and so on, and by the time take-home pay comes around they are making $7.50 an hour. If they are making $20 and hour the take-home pay might easily be $14 an hour.

How many minutes does each child have to work to pay for lunch? The first one with $7.50 needs $11.30 divided by $7.50 = 1.61 hours of work. That means working from 8:30 in the morning until after 10 a.m. just to pay for lunch. Those $3 cups of special blend coffee cost 24 minutes of work. Drink them twice a day and the person is working almost one hour a day to pay for coffee. Add in a doughnut and you can figure the numbers. By the way, if you buy the big tin of Tim Hortons coffee, each cup costs about 10 cents.

The kid making 20 bucks an hour is actually earning $14 so it would take him or her $11.30 divided by $14 = .81 of an hour or roughly 48 minutes, to pay for lunch.

HOW TO WRITE A CHEQUE

I know many teenagers have never written a cheque. Yes, I know Interac and credit cards have taken over a lot of financial transactions but when it comes to paying rent or buying a car, odds are they will need to write a cheque.

This seems simple but it’s important to write clearly, and to write on the cheque what they are paying for. And unless they have a lot of money and big overdraft protection, they should record in their bank book the date, amount, to whom the cheque was written and subtract the amount of the cheque from the amount in the account. At the end of the month children should learn how to balance the chequebook.

It’s also a good idea to have overdraft protection on the chequing account so cheques won’t bounce, embarrass them and cost them a pile of money for bounced cheques.

BUILD A CREDIT RATING

Over the years I’ve seen situations where young folks don’t build up a credit rating and suddenly need a loan for a car. Odds are it will be very hard for the young people to borrow any significant amount of money without a co-signer.

There might be several ways to build up a credit rating but the best way is to borrow a small amount of money, say $500 or $1,000 and pay it off before it is due. Then borrow another $1,000 and pay it off again. The idea is to get the young people a history of borrowing and paying back on time.

Having a credit card should help build a credit rating, too, as long as it’s being paid off in full every month.

LEARN HOW TO INVEST

ManyGrainewsreaders have learned how to make money with stocks when they were in their 50s or even 60s. Many now understand how much better they would understand the stock market if they had learned the stuff 20 years ago. We should give our children a running start with the stock market by introducing them to stocks at an early age.

There are several strategies to use with stocks. I can put a name to some of them. One is buy and hold, where an investor buys good stocks with a good long-term business and preferably stocks that pay dividends. Some claim buy and hold is dead but odds are anyone with a 20-or 30-year outlook can make buy and hold work if they pick good stocks. I don’t think buy and hold means buy and ignore. It just means buy good stocks, collect dividends and let the management of the company build the company for you and shares should go up in price over time.

A sideline to that is to use the shotgun approach where an investor eventually holds equal dollar amounts of stocks in up to five sectors. Over the course of a year the investment industry usually rotates money from one sector to another but over the long run, odds are good companies in all sectors will go up. If stocks in each sector pay dividends then money comes in even when one or two sectors are not going up.

The next step might be to become what some call sophisticated investors where we might own stocks in only two or three rising sectors, which often is called the rifle approach. Add to that the strategy of selling covered calls which can bring in more cash flow but can, from time to time, limit gains. Since stocks go sideways about 67 per cent of the time limiting gains often is not a problem.

This has become my personal methodology and I like it for some of our stocks. I don’t sell calls all the time on all of our stocks but then I have to pay more attention to our portfolio than investors who don’t use this strategy. I get paid well for knowing the strategy but it does take some new skills and time.

UNDERSTAND THE MAGIC OF COMPOUND INTEREST AND KNOWLEDGE

These two compounding elements can work magic for an investor. Sadly the magic of compound interest doesn’t work very well these days when money on deposit earns only one to three per cent per year. It worked a lot better when our money was earning eight to 12 per cent per year. In a nutshell, the magic of compounding means that over time the money money earns will also earn money and eventually you get two, three or four generations of earnings earning money.

Put another way, the more our money grows the faster it grows.

The same idea can be applied to knowledge. Once we learn a few basics about how to invest it gets easier and easier to learn more. Investment knowledge is like any other type of education — it’s sometimes hard to learn but easy to carry around once we learn it.

ASK FOR HELP

There is a lot more financial help available now compared to when I was growing up. Some newsletters are better than others when it comes to picking stocks. Some teach so you can learn to think on your own instead of wonder. Other newsletters simply provide information to use at that time and I would say these can make an investor a dependent.

There’s nothing wrong with that if that is what a person wants. I personally wish I had found information that helped me learn faster but that is history.

There are many financial advisers in Canada. Most deal with mutual funds but some deal with stocks. Most financial advisers can help a person plan out an investment strategy but their job generally is not to teach.

Overall, an investor can make his or her strategy complicated or simple. Even buy and hold can be complicated if a person thinks too much, but the so-called sophisticated strategies can be simplified.

I run a few hundred thousand dollars worth of stocks and make a couple trades a week. In a good week I might make $1,000 or $2,000. In a bad week I might lose money. I don’t do a victory dance when I make money and I don’t get all depressed if I lose some. But I do try to keep losses small.

HAVE A STRATEGY

I think it’s important to use good investment strategies. For example the Tax Free Savings Account really is a gift from the federal government. Adult Canadians can pay in up to $5,000 a year, and if you don’t contribute the whole $5,000 you can carry forward the amount and put it into the TFSA the next year.

So starting in 2011 a person can put in or have put $15,000 into a TFSA. Take $15,000 and multiply it by any number, such as times 1.1, for the next 20 years and see how much money there can be in that account. All the money the account makes is tax free so no paperwork at tax time.

RRSPs might take second place now after the TFSA but contributing to an RRSP can reduce taxable income and can become a place to borrow money for first-time home buyers. Money in an RRSP grows tax free until you take it out so again if a person puts money into an RRSP and it grows, well there can be a lot of money in the account after 20 or 30 years. It will be mostly taxable income when it comes out but we do pay less income tax when we contribute to an RRSP.

I suspect CRA figured out the after-tax result of both the RRSP and the TFSA and they are designed not to lose money for the government. Still, if contributing to an RRSP saves a person $1,000 of taxes, it will take a TFSA several years to earn enough to offset the refund.

In our family I bought shares in a gold company called Osisko (OSK) in my wife’s TFSA with the first $5,000 and they are up $3,600 or 72 per cent in less than a year. My TFSA has Consolidated Mining (CLM) and it is up about 12 per cent but I think/hope it might catch up eventually. The company does have $1 billion or so of iron ore and there is a good market for that stuff these days and likely for years to come.

I think RRSPs and a TFSA should be the main investment accounts for young people. When a person has more investment skill then a trading account can be set up to add to the investment strategy.

Andyismostlyretired.Hegardens,travels withhiswifePat,playswithgrandchildren andmanageshisownaccounts.Andyalso publishesanewslettercalledStocksTalk wherehetellswhathedoeswithhisportfolio almostdaybyday.Ifyouwanttoreaditfree foramonthgotoGoogle,typeinStocksTalk. net,findFilloutforms,fillinfourlinesand clicksubmit.

About the author

Freelance Writer

Andy was a former Grainews editor and long-time Grainews columnist. He passed away in February 2017.

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