The average Canadian owes $1.54 for every dollar earned. That's a lot of money. This year, many families will pay about the same amount in interest on credit cards as they spend for food!
Being debt-free or eliminating debt is more than merely a financial battle; for many, it's emotional, psychological and habitual. That's why learning smart spending habits is crucial from a young age. Getting your kids involved in financial planning and shopping gives them impactful, hands-on experience in budgeting. Most kids are ready to start handling small amounts of money by age seven or eight.
Here are some great tips to teach your younger children to budget and save:
No matter what they're shopping for, give your kids a budget and let them create the shopping list. Set up a reward system if they spend less than the budgeted amount, and encourage them to browse flyers for sale items.
Need to re-stock on school supplies for next semester? Teach them to shop around for the best price -- things like pens, pencils and notebooks will likely be more affordable at a dollar store, for example.
Food usually gets kids' attention. Have them help you plan your grocery list for school lunches and snacks, and let them calculate the tip at a restaurant if they are old enough.
Require them to spend their money for some of their "needs" as well as their "wants." For example, encourage them to contribute (at least in part) to gifts for their friends' birthday parties, or get them to pitch in on a new pair of sneakers.
Save, save, save! Kids should be saving a portion of their allowance or paycheque (for those working part-time at their first jobs). I recommend starting with 10 per cent of the amount earned. Again, this is about creating a habit that they will carry with them as they grow up.
By helping you to plan, save and shop, as well as using their own money on select items, your kids will learn to budget, and evaluate "needs" versus "wants," putting them on a path to financial success from a young age.
Older kids who are in college or university need a strong background in financial management skills to help avoid debt problems that can cause depression in students and affect study habits and academic performance. In addition, students strapped with high credit card debt have a more difficult time repaying student loans and have an increased probability of default. My number one tip is to teach them how to handle credit wisely:
Before they apply for their first credit card, ask what they will use it for and more importantly, how they will pay the bill. Advise them to start with one card with a low credit limit, and use it responsibly before they even consider getting another.
Help them decipher the fine print on the inserts enclosed with their bill. Credit card offers differ substantially, and issuers can often change the terms at will, or with only 30 days notice.
Encourage them to pay off their balance each month. Here's a good example to share: If you owe $1,000 on an 18 per cent card, for example, and you pay only the minimum each month, it will take you 12 years and seven months to repay the balance!
Educate them about late payments. Even one late payment can put a black mark on their credit record -- and might cause the issuer to raise their interest rate to the maximum allowed under their agreement.
Help them set a budget. A good rule is to keep debt payments less than 10 per cent of their after-tax income. If they take home $750 per month, for example, they should spend no more than $75 a month on credit card payments.
Creditors market heavily to post-secondary students since they have good earning potential and lots of expenses. Being armed with the right information and know-how can save your kids a lot of money and stress. For more budget resources, contact a not-for-profit credit counseling agency.