Building your Financial
Success
With Alain Aube
Planning for financial success
Reading, Writing and RRSPs - the three 'R's' of essential financial
learning for your kids
You're young, you get a part-time job,
and you have 'earned' money in your pocket for the first time. What do
you do? Without a doubt, the greatest temptation is to spend, spend,
spend! … on designer duds, computer games, fast food and faster cars.
And you just might do that - unless you learned good money handling
habits while growing up.
That's why it's never too early for parents to begin teaching their kids
about the value of money and the simple rules for financial stability
through life. Yes, money should be enjoyed but, by taking a responsible
approach, your kids will have money on hand to enjoy when they want it.
So it's important for them to develop their 'hard' money skills by
reading about debt, credit, income and investments, and by teaching them
how to write a realistic budget and longer-term financial plan that
aligns with the 'soft' money skills of achieving their life goals and
dreams.
And it's never to early for youngsters to
start investing. In fact, they may even have an advantage over an adult
in making their money grow. This is because an adult's investment
returns are usually subject to taxes (if outside a registered savings
plan) while a child is unlikely to have a taxable income, so they can
often retain all of their investment profits.
Which brings us to Registered Retirement
Savings Plans (RRSPs). If a youngster doesn't make enough money in a
year to pay taxes, it would seem to make little sense to invest in an
RRSP for the purpose of reducing taxes - and that's true … if you're
thinking short term. But, there's still a very positive place for RRSP
planning in your child's life - here's why:
• Youngsters who work should file their
own income tax return, regardless or whether they will pay tax. This
enables the youngster to build up RRSP contribution room, which can be
carried forward indefinitely. That contribution room can be 'filled'
when the youngster becomes a higher-earning adult and his or her tax
rates are higher. So, in effect, a non-taxed youngster who reports every
penny of income is actually benefiting by maximizing their ability to
make future RRSP contributions.
• Alternatively, a youngster can contribute to an RRSP during his or her
non-tax-paying years and wait to claim the deduction in a tax-paying
year. RRSP contributions do not have to be claimed in the year they are
made, but can be carried forward indefinitely. As a consequence, your
youngster enjoys the immediate benefits of tax-sheltered growth and the
ability to make the most of the contribution deduction in his or her
future tax-paying years.
To invest in an RRSP, a child must have a
social insurance number, and RSP contribution room based on 18 percent
of their previous year's 'earned' income (money made from employment and
reported on an income tax return before deductions).
It's important to teach your kids about
money and investing - and it's important that you know the best ways to
invest for yourself and your family, as well. Your financial advisor can
help suggest suitable RRSP and non-RRSP strategies for everybody in your
family.
