Many kids across the country are back in class after nearly a year and a half of learning remotely. But for Grade 9 students in Ontario another thing has changed: The math curriculum now includes financial literacy. Julie Seberras, Senior Manager of Wealth Planning Support at TD Wealth, joins Kim Parlee to discuss some money lessons we hope will go in one ear and stay there.
Here to jump start their skills is Julie Seberras. She's senior manager of wealth planning support at TD Wealth, one of our favorite guests. And, Julie, you've got five lessons for us. So let's jump into them. Number one is saving is one thing. But we should really talk about compounding.
- Absolutely. And so compound interest is really what allows your savings to grow exponentially over time. And so when you invest, interest is calculated based on the principal amount that you have invested. But over time, what happens, not only are you earning interest on your original investment, but you're also earning interest on interest. So let's put some numbers around this.
So let's say you invest $100 at 5%. At the end of the year, your savings are now going to be worth $105. Come year two, the 5% is going to be calculated based on $105, not your initial investment of $100. So that $105 is now going to grow to $110.25. So the compound interest really benefits you with your savings growing over the long term.
Now, we do need to take a look at the other side of this. And that's debt. So when you borrow, whether it be credit card, line of credit, loan, it's also going to be subject to interest. And that interest also compounds.
So let's put some numbers around this again, same numbers. You borrow $100. If that amount is still outstanding at the end of the year, you're now going to owe $105. And let's say that amount is still outstanding at the end of year two. You're now going to owe $110.25.
And so, really, what you need to keep in mind is that the interest rate attached to borrowing is usually much higher than the interest rate attached to savings. And what you want to do is take advantage of compound interest to help your savings grow. But be aware of how compound interest is going to impact any amounts that you owe, such as debt.
Now, one thing you can do with your kids is use a compound growth calculator that you can find online. Plug in some numbers. And show them how their savings can grow over time.
- What a great explanation. And again, compounding is somebody you want on your team, not on the other team. So a thing to keep in mind.
Lesson number two-- pay yourself first. We always hear this. But what does it mean?
- So quite simply, Kim, it means when you receive money, whether that be your paycheck from your part-time job, whether that be some cash you got from a relative for a birthday or holiday, is that you are going to pay yourself first in savings before anything else. So I suggest that you take that money, put it into a separate savings account, separate from the money that you're going to spend.
And so if you develop a disciplined savings approach early in life, I guarantee you this is going to benefit you throughout your lifetime. And so what you want to do is allocate a percentage that you're going to put into savings where you pay yourself first each and every time you receive money. So what's going to happen is that as your income grows, so does that percentage, increasing the amount that you're putting in savings each and every time.
Now, one thing you can do with your kids if you're paying them an allowance is keep back a little money. Have them pay themselves first. Set up a savings account. Put it in their name if possible so that they can see their savings grow over time. Now, you might get a little pushback because you're hanging back a little bit of their allowance. But trust me, they'll get on board once they see those savings growing.
- That's awesome. Lesson number three-- and no one really likes this lesson. But you don't get to keep your whole paycheck.
- It's true. And we learn this lesson right from our very first paycheck. And so your employer is going to be required to withhold some deductions at source. So let's go over some three primary deductions that you can expect.
The first one is going to be income taxes. This is going to be a combination of both federal and provincial income taxes. And provincial income taxes do vary by province. So if we were to take a look at two individuals earning the exact same income, one in Ontario and one in Alberta, the person in Alberta gets to keep a little bit more of their paycheck because those provincial taxes are lower.
Now, what I also want you to be aware of is that every Canadian is eligible for the personal basic amount. This is the amount that you can earn in income before you start paying income tax. And so for 2021, the federal amount for the personal basic amount is $13,808.
The second deduction that you can expect if you're 18 years of age living in any province other than Quebec is Canada Pension Plan. So your employer is going to hold back 5.45% of your pay. They're also going to match this amount and remit it to the government on your behalf. And where this money is going is that you're going to start accumulating your pension benefits through Canada Pension Plan that you can start receiving as early as age 60. Now, this deduction only applies to any income in excess of $3,500 that you've earned for that calendar year.
And the last deduction that we're going to mention is going to be employment insurance. So this is going to be 1.58% of your pay is going to be deducted, also matched by your employer and remitted to the government. And where this money is going it's going to fund the employment insurance program.
And this is the program that provides benefits to eligible Canadians who are out of work. So I highly encourage you to sit down with your teenager with their first paycheck that they've gotten and really help them understand these deductions, because they are going to be applicable to your paycheck for the rest of your working career. And they may also have some additions on their paycheck, such as vacation pay, that is also important for them to understand.
- Good points. And, again, it is always that sticker shock when you first get that first one. And you see what you thought you were going to get and what actually happened. OK, number four is creating a budget and sticking to it.
- Yeah. The skills around developing a budget and being able to stick with it will benefit you for your lifetime. And really, what we want to do here is understand where are you spending your hard earned money. So to create a budget, what you want to do is track that money coming in so we have that income coming in. But don't forget we have those deductions that I just mentioned-- income tax, Canada Pension Plan, and employment insurance.
Then we also want to take a look at the money going out. These are your expenses. Usually, we divide these by discretionary and non-discretionary or, in other words, needs and wants. And lastly, don't forget to capture paying yourself first, those savings that are going to come off of your pay that you put directly into your savings account as well.
I really encourage you to be as detailed as possible when it comes to your budget. So when you get off track, you're able to pinpoint where that happened and get yourself back on track by adjusting and realigning. And that adjustment, typically, means that you're going to need to dial down in another area, such as your non-discretionary expenses, to make up for that.
And so what you can do with your kids is have them develop a budget that would be suitable for a first year university student. Do some research. What does it cost for tuition, books, residence, entertainment expenses? And have them put together a reasonable budget based on their research.
- Great insight. And again, it's that non-discretionary that doesn't feel non-discretionary often to kids a lot of times. But that's part of the problem. Last one-- I got 30 seconds-- file a tax return. Why do we want to tell kids to file a tax return?
- So a few benefits to this. First and foremost, filing a tax return reconciles their taxes paid with taxes owed. If they paid taxes in excess of what they should have been, this is their opportunity to get that refund. So keep in mind, they should not be paying taxes on any income earned below that personal basic amount.
Second of all, they're going to be earning RRSP contribution room. So even though most financial institutions won't open an RRSP for anybody under the age of 18, the important part here is that they're accumulating the room. That can be carried forward indefinitely. And they can use it when it's more advantageous to them.
So there's lots of tax preparation software. They're often free for those with lower income. As soon as your teenager starts earning income, get them to start filing those tax returns.
- Julie, thanks so much. That is Julie Seberras with the top five lessons kids should learn about money.