Over the years spent teaching financial planning courses, I could count on two common comments:
- I should have taken this course years ago.
- My children should take this course.
Although we’re not currently offering our courses, we are reaching out through WealthSmarts to help people more effectively reach their goals through sound wealth management. Our reader feedback again returned to the theme: “Young people need help with their financial planning.”
I’m going to outline the opportunity for young people to break through and achieve early success, based on the experiences of some very successful young clients I have (I have changed the names and the circumstances to protect privacy). Then I’m going to honestly tell you what the real issues are and how to bridge the gap between knowing and doing.
James and Jennifer were young newlyweds when they were referred to me 20 years ago by their accountant. James was a budding young engineer and Jennifer had some serious computer coding skills, so they both had brilliant careers ahead of them. Before and during their college years, they also had part-time jobs which helped them get an early start on their savings and allowed them to pay for their educations in cash. They had some savings left over, small RRSP accounts, no student debt and knew they were going to try to start a family right away.
I took stock of their goals of private education for their future children, saving for the children’s post-secondary educations, retiring in the same lifestyle they were enjoying and protecting their incomes in event of serious illness, injury or death. We also did not neglect their short and mid-term goals of travel and the opportunity for Jennifer to take time off to spend more time with the children. They had already bought a house together and were intent on paying off their mortgage as soon as possible so that they could free up cashflow for continued investment opportunities and for an eventual upgrade to their home.
We built a plan together that would accommodate all those goals.
By focusing on meaningful long-term goals and living frugal but generous lifestyles, James and Jennifer accomplished the following key steps:
- First protect their incomes in event of disability or death by purchasing appropriate insurance coverage.
- Assuring wills and powers of attorney were in place to assure their wealth was transferred properly in event of death and to assure they each had the power to carry out each other’s business and legal affairs in event of incapacity.
- Together we determined a comfortable monthly RRSP commitment which systematically bought into a globally diversified equity portfolio. Despite market volatility over the past 20 years, that portfolio has served them very well.
- As children came into this world, we increased the insurance coverage to more fully protect income during these key dependency years. We also set up Registered Education Savings Plans (RESPs) to maximize the Canadian Education Savings Grant (CESG) and provide the funding required for post-secondary educations.
- Because Jennifer’s parents had done quite well during their lifetimes by following similar habits, they gifted them $200,000 which allowed James and Jennifer to pay down part of the mortgage and also to set up a non-registered investment portfolio.
- As their incomes rose, they were able to begin transferring funds into Tax-Free Savings Accounts (TFSAs) when they were introduced in 2009.
- By regularly making extra prepayments on their mortgage, James and Jennifer are now mortgage free, with approximately $600,000 in their investment portfolios.
- The children are now approaching their post-secondary years and have had the benefit of open communication where their parents talk honestly about the future, the opportunities, challenges and, yes – even the money and how it does not magically fall from the sky.
- Jennifer is now pursuing some new business opportunities to exercise her creative gifts and earn an additional income stream to add the finishing touch to the fulfillment of their plans.
- James, Jennifer and their children have developed incredible growth mindsets. The capabilities and confidence they all have has prepared them for every new opportunity they choose to embrace.
The lessons that James and Jennifer learned along the way can not only be taught to their children – they can be taught to all of us, especially young people:
- Have a real written financial plan – don’t try to wing it or keep the plan in your head.
- Focus on important goals and ignore the shiny objects – they will always lose their luster, keep you wanting more and drain your financial resources. More importantly, avoid the allure of easy credit – the only debt you should have is a mortgage on a home that you can afford.
- Parents, be the change you want to see in your children – they learn from your example.
- Remember that your most valuable asset is the ability to earn an income and that has a massive impact on the success or failure of your family’s future. Make sure to protect it well and have an estate plan with proper wills and powers of attorney.
- Start early by setting up a monthly commitment to pay yourself first.
- For long-term investments, embrace the power of globally diversified equities and try to minimize unnecessary investment costs.
- Take advantage of every opportunity the government assists us with through RRSPs, TFSAs and RESPs
- Take advantage of mortgage pre-payment opportunities rather than looking for new things to spend money on.
- When opportunity arises and with the confidence in knowing the children are responsible with their money, parents can carefully consider gifts while they are living and able to enjoy seeing their children progress more rapidly as a result.
- Be open to a “side business” that can provide a creative outlet and additional income.
- This lesson is the simplest, most difficult and absolutely most valuable all at the same time and most people never learn it: “Spend less than you earn.”
Our world has always been changing at an exponential pace and that makes everything appear to be moving faster than ever before. The fact is that there is no magic bullet when teaching your children about financial planning. Again, you must be the change that your children learn from. You are the teacher and your example especially can be the most transformative gift they could ever hope for.