Thursday, July 24, 2014

Students get failing grades in finance

School may be out, but students still have a lot to learn.
We’re not talking physics, philosophy or anatomy. When it comes to money, most university and college students and grads are clueless about basic financial literacy.
Kelley Keehn says students need to spend “five minutes a day” learning about their finances, whether it’s examining a credit card bill or making a list of goals. (Sun Media News Services)
Kelley Keehn says students need to spend “five minutes a day” learning about their finances, whether it’s examining a credit card bill or making a list of goals. (Sun Media News Services)

Post-secondary students are drowning in record student loan debts and don’t know the first thing about personal finances, experts say. According to a recent Money Matters on Campus survey, most respondents couldn’t answer six basic financial knowledge questions.

Financial illiteracy in Canada is high, says personal financial adviser Kelley Keehn.

“Students are looking to their parents to teach them financial basics, but their parents don’t know where to start — they’re not financially literate either!”

According to Keehn, “it’s insane that grads are entering the workforce or wrapping up their schooling without financial basics.” But it’s like health — “too often we don’t address this area of our life until there’s a glaring problem.”

Student financial stresses abound: 27 per cent worry about money, more than finding a job or their grades.

“Furthermore, 32 per cent of students have significant trouble paying their bills while at school and thousands of students each year are withdrawing from their program before graduation,” according to a 2013 BMO student survey.

“With the added anxiety of having to start paying their student loans only six months after graduating, it’s no mystery that students have to make hard financial choices, and many of them because of a lack of financial education and planning that could devastate their personal monetary future,” says Keehn, speaker and author at

She strongly advises spending five minutes a day learning about something in your financial life.
“Open up your credit card statements and examine every detail. Make financial goals and want lists — make it a priority in your life.”

Be sure to hit the books — money books, that is.

“After graduating is not an optimal time to do a crash course on budgets and living within your means,” financial expert Nathan Dungan says. “Suffice it to say it can be a harsh transition for grads when the First Bank of Mom and Dad is no longer open for business.”

With our society moving towards a cashless world, it’s even more dangerous for young people.

“Students don’t understand the tangibility of money,” Keehn says. “They’ve rarely held money in their hands or computed, ‘If I want to buy these shoes or go out with my friends to the movies, here’s the amount of cash I need and here’s how long it took me to earn it.’ They don’t understand negotiating skills and basics like shopping around for a better rate on their student loans.”

Keehn stresses that students need to examine needs vs. wants, and learn how to prioritize and how to save up for wants. They also need to realize the importance of a good credit score and how quickly it can be ruined.

Get educated on the cost of debt because it costs — lots! And learn the magic of compound interest, Keehn says.

“Einstein said it should have been the eighth wonder of the world…‘Those that understand it, have it and those that don’t, pay it.’”

— JOANNE RICHARD, Sun Media News Services

FP summer school: Making compounding interest your friend


Illustration by Mike Faille, National Post

Summer school isn’t punishment. Think of it as a second chance or bonus education. So whether you’re trying to repair your finances, make more cash or make smarter money decisions, we’re here to help. FP’s back to basics series continues with a lesson in compound interest.

It’s been called magical. A miracle. The eighth wonder of the world. You’d think it was a supernatural aura or a spectacular monument, but nope, it’s compounding interest.

Saving money can be hard. It involves discipline, sacrifice and planning. It involves putting aside today’s wants for future needs.

For motivation, think of the big picture, think about your goals, whether you’re saving for a home, education, retirement or a vacation. Continue reading

What exactly is that? Think of it as interest on interest. It’s interest on your initial principal and then on the accumulated interest. And think of its power like the Force. Depending on how it is used, the power can be good or evil. It can be your friend or your enemy depending on whether you earn it or you pay it.

How to make compounding interest your friend:

Time can turn compounding interest into your BFF. This friendship just grows and grows over the years and before you know it, it’s this huge, valuable asset that supports you.

“It’s like a snowball. You start with a little thing and it rolls down the hill and one day, you think, ‘Wow, I have a little nest-egg!’” says Kelley Keehn, author of A Canadian’s Guide to Money Smart Living. “We as Canadians, we hate to crunch numbers but numbers are our friends.”

Let’s say you invested $1,000 and it earned 5% in interest last year. Today, you’d be earning interest on $1,050.

Now, let’s say you left $1,000 in the bank to grow for 30 years with a 5% rate of return, compounded annually; even if you never added any more money, you’d have more than $4,300.

In other words, compounding interest can only be your best bud if you are patient.

“When you put something away compounding for a number of years, make sure you can stand that,” says Adrian Mastracci, a portfolio manager and president of KCM Wealth Management in Vancouver. “Or the chances of getting out of it with something in your pocket is not very good in terms of interest.”

Our low interest rates have dulled the potency of compounding interest with traditionally safe savings vehicles such as GICs and bonds. “Fourteen years ago, you got 5, 6, 7% on your GICs. You’d be excited to get 2% or 3% these days. On the plus side, inflation used to be higher so the net to you today is not bad.”

Whether you’ve invested your money in GICs, term deposits, mutual funds, stocks, bonds, exchange-traded funds, etc., where should you put your compounding interest? How about somewhere it can grow tax-free? “Because interest is taxed at the highest rate, that’s a good reason to put it in an RRSP or a TFSA or an RESP,” he says. “With a TFSA, you might be better with dividends and capital gains by buying stocks.”

Read the full article here

How to introduce your kids to invisible money

By Josephine Lim at
View the full article here

All the signs are pointing toward a cashless -- or mostly cashless -- future. As more and more companies embrace mobile payment systems and online currencies gain notoriety, people have adapted to cashless payments.

But if you have kids, don't switch to all plastic, all the time just yet. It's best to first expose kids to cash in order to teach them its value before letting them handle invisible money. Then, gradually introduce them to plastic. kids-and-plastic
Cash first
Robin Taub, a CPA, chartered accountant and author of A Parent's Guide to Raising Money-Smart Kids, says teaching your children to pay with physical cash will feel more "real" to them than swiping a card. In other words, it'll make more of an impact if they have to physically part with their hard-earned money at the checkout.

Having children using cash first helps them equate a value to the number they see on a bank machine screen, adds Brian Betz, a counsellor with Money Mentors.

Expose your children to counting cash, calculating change and saving money in a piggy bank. This will build good habits for when they graduate to a real bank.

Next step, debit cards
Once your child sets up a bank account, a debit card is a good first step toward "invisible money." Unlike credit, a debit card draws funds directly from your child's account, says Taub. Introducing your children to debit comes with many teachable moments. Children can learn how their money is stored in the bank, how ATMs work, and how to check and understand their balance.

While there's no set age to give your child a debit card -- it all depends on your kids' maturity levels -- Taub says you may want to consider debit for your kids once they are 9 or 10 years old. They should be able to comprehend that they can only spend what is in their account, and that using a bank account is similar to the piggy bank -- once you empty it, there's no money to use until you fill it up again, says Betz.

It's also a good idea to have them earn their money -- give them a weekly list of chores they must complete before collecting their allowance, or whatever works for your family. The sooner your children understand that they can't get something for nothing, the better.
"Talk with [your kids] about it, make sure they understand and know what they're doing," says Taub. "You need to maintain some oversight as well, you can't just let them loose -- you do need to keep an eye on things."

When you set up the account, make sure your child understands their debit card's daily and monthly transaction limits. Teach your child about the consequences of overdrafting (and explain what overdrafting is). You may also want to impose your own rules and limits -- perhaps you want them to put at least $10 a month into a savings account, or you don't want them to spend more than $20 a month on entertainment.

While you should monitor your child's account and spending, you don't want to do so secretly. Be open about how often you will look at the account and what you'll be looking for. You don't want to encourage your child to be secretive about money.

BMO, RBC, CIBC and TD Canada all offer bank accounts for children.

Finally, introduce credit
After your child has gotten a handle on debit card use, along with good saving and budgeting habits, you can introduce them to credit.

"Unfortunately, so many young adults get thrown into [credit]," says Kelley Keehn, a personal finance expert and author of The Prosperity Factor for Canadian Kids. "They don't have any idea that a $1,500 limit is not $1,500 bonus money. Get them to understand that it's a tool to be respected and paid back and it's not found money."

Taub agrees that it's a good idea to introduce credit at a younger age, rather than waiting until your child is headed off to university. If your kids are young, Taub says, you can take away their card and go back to a cash system until you feel they're ready to try again. You don't have that option with an older teen.

A good first step is creating a mock credit card system where Mom and Dad act as bankers. Your mock system should follow rules similar to using a credit card, says Keehn.
For example, if your child has his eye on the new video game that just came out, but doesn't quite have the money for it, offer to buy it for him. Explain that he has a certain amount of time -- say, a month -- to earn the money to pay you back for the game. If he doesn't pay you back on time, increase the amount he owes you (very slightly, so as not to overwhelm him) each day until he can pay you back in full. Also, explain that the longer it takes him to pay you back, the less likely you are to offer him a loan again. Thus, you teach him how credit and interest work, and how not paying back in time not only costs him more, but hurts his image.

It's important to structure the system for an item that's beyond your child's financial means, as lessons of credit and borrowing help them understand the process of repayment, the trade-off of purchasing one item over another, and its effect on future purchases.

Share your money mistakes and the consequences you experienced, adds Betz. You'll show them that no one is perfect when it comes to money management, and your child can learn from your mistakes.
When you decide it's time for your kid to get a credit card, explain how minimum payments work and how payment history determines credit score (and why a good credit score is important). When your child begins to use the card, go over the bill line by line, discussing each transaction. Teach them to look for erroneous or fraudulent purchases.

Be prepared before you dive in
There are risks involved with letting children use invisible money, but it's important parents don't bail them out. Kids can't learn from the consequences of their actions if they expect mom and dad to help them, says Betz.

It takes time and practice to instill good money habits in your children, and for parents to do it right, they need to be aware of their own financial habits.

"You're the role model, they're going to mirror your attitudes and values and don't think you're going to be able to pull one over them," he says. "Be prepared for those conversations."