Teaching Kids How to Invest
As parents, we work hard to keep our children happy and healthy and give them the tools they need to succeed as adults. That includes teaching them about money — why it’s important, where it comes from, and how to manage it wisely. Unfortunately, this is an area largely lacking in the school curriculum. Maybe that’s why the Ontario Securities Commission reports that 42% of Canadian children between 20 and 29 are living with their parents, primarily for financial reasons.1 However, you — and we — can help kids learn about investing, starting with mutual funds.
Why start with mutual funds?
Mutual funds can be a great place for young people to learn about investing and to start their own portfolio. Low minimum investments make them easily accessible, regular contributions are easy to set up, and with a huge variety to choose from, we can surely find a fund that appeals to your young investor.
Investing allows kids of all ages to start building a nest egg and gets them involved in their own planning for the future. When good habits like these are established early, a child may be more likely to carry them on into adulthood. The following examples illustrate how even children who are too young to open their own investment account can learn from mutual fund investing.
In-trust accounts for minors
Every year, Thomas gives his granddaughter, Ellie, cash for her birthday on the understanding that she will save some and donate a portion to charity. The rest she can spend however she wants.
For her 13th birthday, however, Thomas has a surprise for Ellie. His gift is $2,500, but there’s a catch — she has to invest it. He sets up a mutual fund account under his name that’s “in trust for” Ellie.
While any interest and dividends generated in the account will be attributed to him for tax purposes, capital gains can accrue indefinitely and when realized will be taxable in Ellie’s hands.
Thomas explains how mutual funds work and helps her select the ones she wants. Every month, they go over Ellie’s statement together, tracking her funds’ growth.
Every year, Thomas plans to gift additional funds to Ellie for her investment account. He hopes that by the time she graduates from high school, there will be a tidy sum she can use for her post-secondary education.
Becoming an adult
Like so many young adults, Aiden, 18, is keen to see the world. His plan is to save as much as he can over the next three to five years and then spend six months travelling. But what’s the best way to save?
His mother suggests that he talk to her financial advisor, who tells Aiden about Tax-Free Savings Accounts (TFSAs) and mutual funds. In a TFSA, Aiden can invest up to $10,000 a year. By choosing balanced mutual funds, he can earn a mix of interest, dividends, and capital gains that is likely to be more than the interest he could earn in a savings account — all of it tax-free. And when he’s ready to take his trip, his withdrawal will also be tax-free.
Establishing a foundation for life
Marco, 24, has just landed his first “real” job. It’s an entry-level position for now, but Marco is excited about the possibilities. Marco’s father suggests that he start contributing to a Registered Retirement Savings Plan (RRSP). Marco agrees to talk to his dad’s financial advisor to learn more.
She explains that Marco can have regular deductions made from his paycheque that can go into an RRSP. With some mutual funds, he can start investing with as little as $25 per contribution. He’ll get a tax deduction for his contributions and the earnings will be tax-deferred until he takes them out.
She suggests that he may want to focus on equity funds with high growth potential. With his long time horizon, Marco can easily ride out any temporary market declines.
We’re here to help
If you’d like to introduce your children or grandchildren to the benefits of investing, we can help. Next time we get together to discuss your portfolio, why not bring the kids along?
1) Ontario Securites Commission, GetSmarterAboutMoney.ca, “Dealing with your teen’s bad money habits.”
Larry Kleinmintz, R.H.U., T.O.T., M.D.R.T.
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