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As a parent, you want your child to have every opportunity in life. Part of that is making sure that you’ve set them up for financial success down the road. But in the day-to-day hubbub of being a parent, it’s easy to just want to get through today and worry about tomorrow later.
When it comes to preparing financially for your child’s future, however, the earlier you start, the better. We’ve put together a few tips to help you build the best plan for your child so that when your little one is not-so-little, they’ll be financially ready for whatever life throws their way.
1. Open a savings account (or two)
Opening a savings account for your child while they’re young will give them a great head-start on financial readiness in the years ahead. While they’re still little, you can deposit some of the monetary gifts they receive into the account, as well as any extra cash you’d like to put in yourself. When they’re a little older, they can start contributing themselves and eventually take ownership of the account.
This savings account can function as a general savings account, an emergency fund, or an opportunity fund. That way, not only are you laying the foundations for their financial education (more on that later!), but if any unexpected expenses pop up–like a guitar for those lessons they’ve been wanting to take–they’ve already got that money set aside.
You may also want to consider opening an RESP (Registered Education Savings Plan) for your child. Their post-secondary education will likely be one of your biggest expenses as a parent, and while it may seem far-off, it’s never too early to start building toward.
An RESP allows you to save money tax-free toward your child’s post-secondary schooling, up to a lifetime maximum of $50,000. The Canada Education Savings Grant will even match 20% of up to $2,500 in contributions per child each year, which could add up to an extra $500! When school rolls around, the beneficiary of the RESP–your child–can then withdraw these savings without penalty for school-related expenses, such as tuition or class materials.
Having an RESP in place now, no matter how young your child, is a great way to avoid the sticker-shock of the post-secondary price tag down the line, so you’re not scrambling to come up with the funds before school starts.
2. Cover your family with life insurance
It might be difficult to think about, but it’s important to have financial protection in place for your family if the unthinkable were to happen.
Life insurance provides a financial safety net for your loved ones and peace of mind for you, so you don’t have to worry that the hard work you’re putting into your family’s finances would be in trouble if you were no longer there to help.
Life insurance works by providing a tax-free payout to your dependents if you were to pass away, which can be used for anything from final expenses, to mortgage payments, to your child’s education, or anything else your family might need. Before choosing a policy, make sure to do your research and read up on life insurance company reviews so that you can be confident you’re making the best choice for your family.
The two most popular types of life insurance are whole and term life insurance. While whole life insurance provides lifelong coverage, it also tends to be the more expensive option, and covers you for longer than you’ll probably need it.
Term life insurance, however, provides coverage for an agreed upon term length, usually between 10 to 30 years. This means you’re protected for just as long as your family needs it, such as when your kids are still young and in school, or while you still have a significant balance left on your mortgage. Term life insurance is also typically much more affordable than whole life insurance, so you can save the difference.
If you need help figuring out exactly how much life insurance you and your family might need, use a life insurance calculator, so you can be sure your loved ones have just the right amount of protection in place.
Life insurance might not seem to be at the top of your financial priority list as a parent, but it’s essential in protecting the financial future you’re building for your child. Just remember–it’s better for your family to have a safety net they don’t use than need one they don’t have.
3. Teach your children financial literacy early
Laying the foundations for your child’s financial future means more than just giving them the resources–it also means teaching them how to use these resources.
It’s never too early to teach kids about money. Here are a few ways you can introduce the idea of money management early in your child’s life:
1. Consider providing your child with an allowance as a way to begin teaching them about the practical aspect of money. Rather than just talking about money, provide them consistent small amounts so they can move from thinking to doing. This should be dependent on age and stage. Some experts recommend starting when kids are 6-10 years old and give $1 per week for each year, so an 8 year old would get $8/week. This is a simple guide, but you’re the best judge of the amount that would be appropriate for your child.
2. Set expectations for how the allowance is going to be spent. It’s great that kids now get the real experience of having money, but it can’t just be without specific guidelines. Spending without limits doesn’t exist in the real world, so why would it work to teach children good money management? A simple way to look at the ways to divide the allowance is to consider three “S’s”: 1) saving, 2) sharing, and 3) spending. The third one, spending can be further divided into a) planned spending, such as specific expenses they know/want to have or a specific goal they set, and b) freedom spending, money used for anything they want. The next question might be how much goes in each? That’s up to you and your child to determine, but a simple rule might be to divide it 10-10-80. Save 10%, Share 10%, and spend 80%. To help kids learn how to manage money, they need to see that there are a variety of purposes for it beyond just the immediate gratification of spending it.
3. Make it easy for kids by considering their age and stage, how they best can learn, and what would be the best way to help them develop the skill of managing money. Whatever allowance schedule you determine with your children, be sure to stick to it. Consider how you give it to them. If they need to divide their allowance into the three categories, be sure to give them smaller denominations or change that can allow them to accurately divide the amounts to fit each “S”.
4. Allow your children to make money decisions on their spending money without judgment, ridicule or criticism. Openly talk with them about their decisions, ask questions to help them reflect and evaluate. It’s also very important that you as a parent actively participate in the process of modeling good financial literacy.
However you approach teaching your little one about financial literacy, the most important thing is setting them up with skills that they can carry over into adolescence and adulthood, so that they can maintain the groundwork you’ve put down for them.
Getting started early is key
Planning for your child’s financial future can be tricky when it feels so far away, but kids grow up in the blink of an eye. Getting a plan in place while they’re still young is crucial, so you don’t have to worry later.
With these tips, you’ll be able to ensure that your young one has the best chance possible of financially thriving as they grow up, no matter what challenges they might face.