Parents, Children and Some Financial Planning Considerations: Preparing Money-Smart Young Adults

October 9, 2024

Each generation faces their own set of economic circumstances that impacts their approaches to planning for their future. Parents play an essential role in supporting their children in considering and realizing their life goals. Many young people may find it overwhelming to consider all the options and create their own plan to achieve their professional, financial and personal aspirations. Here are a few tips to help guide young adults in finding their own unique path through the forest.

Goal Setting

The key to financial success is goal setting which are personal objectives you set out for yourself for the short and long term and will be easier to achieve if they are identified in advance. This includes knowing what result you hope to achieve and making a clearly defined step-by-step action plan to achieve the goal. All goals should follow the SMART goal strategy:

Specific

Measurable

Achievable

Relevant

Time-bound

Once you have identified your goals and created the action plan, it is then essential to prioritize them in order of importance to ensure they are manageable. Some goals may need to be set aside for the time being to concentrate on the most important ones or some may need to be redesigned with a lower expectation or greater time frame to make it attainable.

Learn to Budget

Creating a budget is one of the most important things you can do to set yourself up for financial success. Start by calculating your net income, which is your take home pay after taxes and all deductions have been subtracted from your earned income. Then create a list of expenses.

It is important to understand the difference between a want and a need when writing down your monthly expenses. Needs are the required costs including rent, groceries, utilities, and insurance which can be controllable to some extent. Wants are typically things that we enjoy which are discretionary and may include going out for dinner, concerts, or vacations. This is the part of the budget that has the most flexibility and likely requires more attention and focus.

After completing this process, create a spending plan, be objective, and assess your needs, wants and savings plan for the goals that you have set for yourself. Regularly evaluate your spending habits to ensure you are staying on target. As life changes, goals need to be reviewed and assessed, and often adjusted to meet changing priorities and needs.

Try not to rely on credit cards or lines of credit to pay for monthly expenses as this will have to be calculated into your monthly budget as debt repayment. If not paid back in full by the contracted date, the interest charges can be high and can add up. It can be very challenging to stick to your budget but this will be essential to ensure financial targets are met.

Understanding Financial Options

Take charge of your financial future by learning about the various investment accounts and investment options available. This can be done by seeking the guidance of a trusted and knowledgeable financial advisor, available without cost, to understand the options available to meet your financial goals and help you get started with a customized action plan. Beware of jumping in too quickly to the ease of online investment trading without having all the in-depth investment knowledge. This could be risky if initiated without a thoughtful strategy. Investment accounts include:

Tax Free Savings Accounts (TFSA)

A general purpose savings strategy, allowing Canadians ages 18 and older to contribute and invest in various investment options. The qualified earned income remains tax free while in the TFSA, even when it is withdrawn.

Read more in our previous article:
Understanding TFSA, January 2023

First Home Savings Account (FHSA)

A savings strategy allowing Canadians between the ages of 18-71 and considered a first-time homebuyer to save to buy or build a qualifying first home. Contributions are tax deductible and when a qualifying withdrawal is made, the amount withdrawn is not taxable income.

Read more in our previous article:
What is a FHSA, February 2024

Registered Retirement Savings Plan (RRSP)

A savings strategy to save for retirement. Contributions are deducted from taxable income and therefore reduce income tax liability, income earned is tax sheltered as long as the funds remain within the account. Payments withdrawn are generally taxable income in the year removed.

Learn about the various options available to invest your funds into including:

Guaranteed Investment Certificates (GICs)

Provides a guaranteed rate of return over a fixed period of time, ranging from a few months to several years. Upon maturity the principal amount and interest earned is paid out.

Mutual Funds

Professional fund managers invest pooled contributions from many investors into a variety of securities including stocks, bonds, and money market instruments. The investors share in the income, gains, losses, and expenses.

Read more in our previous article:
Some Fundamentals for Investing and Building Wealth, October 2022

Savings

Every budget should include setting aside money into savings. The money will be used to pay for the goals set out or could be used to pay for emergencies that may come up unexpectedly. When setting aside money into savings be sure to place the funds in an account separate from your chequing account which holds your daily spending money. This will help to avoid dipping into savings for regular expenses or impulse purchases.

Parents can be the example their children follow when it comes to budgeting, spending and savings. It is a good idea to talk about finances early and teach children how to save money, through various strategies such as purchasing items on sale and comparison price shopping, to name a few. Have them practice good spending and savings habits at a young age by having them budget their own money. Starting early will create a good understanding of finances that will carry forward through life and benefit them in the long run.

FirstOntario Credit Union in partnership with Aviso Wealth has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This should be considered as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds. The views expressed are those of the writer and not necessarily those of Aviso Wealth.