Rhonda's Financial Blog

Generation Y: Help Your Kids and Grandkids Survive Financially

Monday, November 21st, 2011

If it seems that there is a constant stream of negative press surrounding Generation Y’s abilities to financially survive in today’s economy, you’re right. It’s a heck of a lot tougher out there today for young people to make it financially. They have extraordinarily high tuition fees that continue to climb at a steady pace, home prices in the lower mainland are pretty much unaffordable for most people and retirement – well that will most likely be a thing of the past by the time your kids or grandkids reach 65. It does look pretty bleak for Gen Y. However, you still need to encourage them to budget and save. If you are able to, help them in financially responsible ways.

Here are a few ideas on how you can help, straight from a financial advisor‘s perspective:

1. Help Generation Y to save for their education.

Young people today are so overly burdened with student loans and lack of job opportunities. If you can help fund some of their educational costs they may have a better opportunity to start their own savings program sooner rather than later. If you are financially able to, direct any child benefits or gifts of money your child receives into a Registered Educational Savings Plan (RESP). Show your kids the power of savings by letting them see their RESP statements and encourage them to put babysitting monies, or other income earned into it. It’s important they contribute somehow to their education costs.

Often aunts, uncles, grandparents & family friends give cash as gifts to young kids and continue the giving cash well into their teens. This money often is wasted on the fun and frivolous things. Why not ask the parents to set up a Registered Educational Savings Plan (RESP) for the child and request any monies you give be put into this education fund. You can even ask for a receipt of purchase. Whatever monies you give annually will also receive the Canadian Government Grant of 20% on the amount deposited up to a maximum of $500 grant annually. In addition, there are other grants the child may qualify for that is based on the family’s household income.

Now the child’s parents will legally be the owners (subscribers) of this RESP. This means they can collapse the plan themselves and take out all the contributions tax free, lose the Government grants and pay a tax penalty on the accrued earnings (if they don’t have room to move into their RRSP).

If you are concerned about how financially responsible the child’s parents are you can also look into setting up your own individual RESP for the child. You just need the social insurance number.

As a financial advisor, I like the idea of one plan for all contributions for simplicity; one RESP statement, one financial institution to deal with and one set of fees. However, if you want to ensure the money is there for when the child needs it, set up an individual RESP. You will then be the subscriber. Remember, if the child doesn’t go to some type of qualified post-secondary school you will have to collapse the RESP yourself and pay a tax penalty on the accrued earnings (if you don’t have RRSP room to move the funds into).

The benefit of an RESP over a regular cash account for savings is that the monies grow tax free until withdrawn and then only the earnings are taxed and in the hands of the presumably low tax bracket student. Secondly, the Government Grants. You can’t beat free money from the Government so take advantage of it as soon as possible.

2. Start early.

Time is a huge factor in building any type of savings. Encourage your young adult kids or grandkids to save and early on. Twenty-five dollars a month directed towards savings may seem like nothing but if you do it consistently month or month and year over year increasing it as your financial situation improves you will have saved ‘something’ and ‘something’ is always better than nothing.

If your kids or grandkids are earning an income working for you and have a social insurance number direct some of those earnings right into an RRSP for them. If they are younger, they will likely spend their earnings frivolously. There may not be a tax advantage by contributing today. However, they can use the contribution at a later date when there earnings are higher but they will get the benefit of tax deferred compound growth right away.

3. Just save!

Don’t focus on encouraging saving for retirement to Gen Y. Just encourage saving!

Thinking about retirement at age twenty is almost ridiculous. Especially for a generation that will have a way different experience of what retirement is or will look like than their parents and grandparents retirement. So don’t discuss saving for retirement with your twenty something year old. Just encourage them to get into a good habit of saving.

Gen Y should build a personal nest egg for whatever financial goals lay ahead. Encourage them to invest as much money as they can into an RRSP each year ‘just’ for the tax rebate. This is free money from the Government to persuade us to save! They can take that rebate and either put it back into the RRSP to get more free money next year and continue to build on their savings or look at paying down some high interest debt.

RRSPs can be much more valuable to Gen Y than just future retirement income. They may help with a down payment on a home (Home Buyers Plan) or fund education for a period of time (Life Long Learning Plan). Both Government plans offer a period of time to pay back the monies into their RRSP’s without incurring tax penalties or you can include the withdrawals as income on your tax return and pay tax at whatever bracket you are in.

Your Gen Y child or grandchild may have a disability at some point in life and have to take a leave from work or decide to stay home to raise kids. If they are in need of a bit of extra income they have their RRSPs to withdraw from. They shouldn’t have much of a tax burden (depending on the amounts they withdraw) and assuming they are in a low tax bracket to begin with. Remember when you take monies out of your RRSP you have to include as income on your tax return and pay tax at your marginal rate. So don’t take money out for frivolous purchases.

When young people start some type of savings strategy early on they seem to continue to build on this habit as they age. Especially as they start to achieve some of their financial goals such as paying off their student loans or buying a home. Savings for retirement tends to be more seriously looked at as we approach our 40s. If you have fostered good savings habits with your Gen Y child or grandchild then it won’t be an impossibility to find money later in life to go towards their retirement goals.

4. Help with the savings. If you can.

If you’re the parent or grandparent of an adult child and want to help build their savings beyond just the RESPs here are a few ideas. If Sally or Jimmy are still living at home in their 20s and possibly 30s and are working, make sure you charge them rent. If you can, afford to put that rental income into an account earmarked for them. When the adult child is ready to move out and possibly buy a place of their own you have helped them to save a down payment already. Don’t let them know you have put that money aside so they have to learn to budget to find the extra monies to put towards their savings goals. What you have saved will just be additional help.

Or you can encourage them to set up an RRSP and direct part of the monthly rent into it (hopefully they are financially responsible enough not to touch the funds as they will own the plan). If grandma and grandpa still give cash gifts or want to give a lump sum gift to help out they can also look at RRSPs for longer term savings or a Tax Free Savings Account (TFSA) for shorter term goals. Both have to be opened in the adult child’s name and have contribution limitations. Your financial advisor can best assist with this.

There are many ways you can help your Generation Y child or grandchild financially. The best thing you can do is teach and mirror good savings and spending habits. Any cash that comes their way encourage them to save some or all of it. Introduce them to your financial advisor. Developing this relationship early on and learning about budgeting and saving for financial goals will help to foster smart financial thinking and actions from the get go.

Image credit: Ned Ragget

How to Have Financial Conversations with Your Aging Parents

Tuesday, August 16th, 2011

Having a will and a final plan in place is recommended as soon as we enter into adulthood. Or at the very least, when a major life event has occurred such as a marriage, birth of a child or maybe even an inheritance.

As depressing as tackling issues related to our own mortality is, it’s a given and it’s better to deal with these issues sooner rather than later. But long before your family members will be dealing with your mortality, you’ll be dealing with your parents’ final arrangements. The reality is, your aging parents will need assistance with their personal and financial planning affairs.

Talking with your parents about mortality and money is never easy but it’s important to do. If you find it difficult to discuss these issues, you can start by discussing your own will and final wishes. Getting their input on your decisions can help you understand the choices that they have made. Hopefully this will open the door to discuss theirs.

Things that you need to discuss:

What they owe, where and with whom – Understanding their level and type of debt is essential. This can include investment properties and investment accounts, as well as lines of credit, credit cards, auto loans and home loans. Although you may not discuss this during your first conversation about their financial planning status, it’s important that you understand exactly what is owed and where those accounts were held.

Their will – Although it may seem grim, you need to know what to expect when your parent passes. Be sure to discuss the pertinent details of the will and know who the executor of the will is. This discussion should also include their living will.

Power of attorneys or representation agreements – These are essential in a health crisis and it’s important for you and your parents to have these established well ahead of time. It’s far better to have these documents in place long before they are needed.

Care scenarios – Do you and your parents have plans for what will happen if they become ill or invalid? This may be the most difficult of all conversations, so you may want to handle this separately from the other financial issues. Be sure to cover whether they’ll downsize and move in with you or go into care facilities.

Final arrangements – Burial arrangements and other final arrangements are important to cover with your parents as well. If you understand what your parents’ final wishes are, it will make it easier for you to follow through with them.

You need to talk early and often with your parents about finances. As they grow older, they’ll become more in need of your assistance with their day to day lives. Whether this comes in the form of financial assistance, shared living space or medical care, it’s important to understand exactly what you’ll be facing when that time comes. Don’t try to talk about all of these issues at once. Make it a point to talk with them regularly so you can keep the lines of communication open.