Making Kids Money Smart, Reprise

Little girl withdrawing money form ATM with help of mother.

Some time back I had written about how we could better prepare children to handle money responsibly, how to help establish good financial habits and why that was important. You might have thought that banks would have played a role in that education, but I failed to talk about them and what positive (and negative) aspects they can play when it comes to a child’s money intelligence.

In theory banks should be the obvious first stop when it comes to talking about money and yet they rarely are. They may not even be helpful. This is partly because banks have long since given up being a waystation for protecting money from the general economy. While banks themselves have always had a central part to play in lending and growing the economy, the roll of doing that off the back of people who are housing their savings for a rainy day has been replaced by the desire to more quickly facilitate economic activity. Whereas banks were once a speedbump on the road to making a purchase, today they occupy the chief role of facilitating that purchase. No one would dare deposit money with a bank that did not provide debit cards, credit cards and easy online financial transactions.

Being money smart though has a lot more to do with instilling patience and setting goals, not immediately reacting to every consumer temptation. But a teenager with a bank account is not going to find that he or she is hindered much by their savings account. Furthermore, they are unlikely to see the benefits of keeping money in a savings account since there is little growth to be offered. This gives banks a paradoxical role in your child’s financial education, one that offers little incentive to save while facilitating bad financial choices.

For instance, TD Bank offers a Youth Account, a basic savings account for children up to the age of 18. There’s no fees, unlimited transactions per month and minimal interest rates for savers at 0.05%, or 50₡ for every $100. However, a child of 12 will receive a debit card with the Visa Debit system and a daily limit of $25 or $50/day. Meanwhile Scotiabank’s Getting There Savings Account offers similar low fees and minimal interest, but throws in 2 free Interac transactions per month and Scene Reward Points for the movies. The lesson banks teach kids is that putting money in the bank helps buy things they want whenever they want it.

For parents who opened an account for their children when they were small it may be a surprise that banks will send teens and pre-teens bank cards. And even approaching a bank about what can and cannot be done with a bank card may not offer up much help. I went to three separate banks to ask about their youth accounts and was frequently met with several “umms” and “ahhs” when I pressed for details. At one bank I was assured that even though the bank card was a “Visa Debit” that card could not be used to buy items online (which is what the Visa Debit system does). When I pressed for confirmation that this was the case the person disappeared to consult with other employees before returning and confirming that online purchases would be allowed. Financial limits are also not particularly inspiring. A $25 limit per day totals pretty quickly, and parents may not realize what that money is going towards since online purchases can be easily overlooked.

And yet.

This is also the system that we live in. Children should be raised to understand that there will be few breaks when it comes to making bad financial choices. Banks and credit card companies will happily provide debt to those who can barely afford it and defend themselves with impenetrable multi-page legal documents. Engaging with this system is essential to beating it.

So what can parents do?

As I wrote back in 2015 the best course of action is to do planning with kids to help establish good habits. Giving kids an allowance in exchange for chores isn’t a bad idea, but it might make more sense to both expand the money that is given, and then set up automatic withdrawals to cover expenses. Rather than receive $20/week as an allowance, consider $50/week and automatically take $30 back for RESP contributions. Or up it even further and charge them room and board. The experience of seeing financial responsibilities coming ahead financial luxury would establish a good habit of the real costs of living.

Another idea would be to sit and plan the purchase of a large item together that a child wants. Maybe it’s a video game system or a subscription of some kind. Go through the budgeting process together and figure out how many weeks it would take to get the item while also factoring money in that time for usual expenses like eating out with friends and going to movies (people still go to the movies right?). Invariably good budgeting forces us to question what we’re doing and whether it makes sense, so the action of picking an item and working towards it will go a long way to either validating those wants or rethinking what to do with that cash.

If you can convince your child to save and budget, help them as well consider alternative things to do when it comes time and they’re tempted to spend the money they were meant to be saving. Budgeting should help provide a passage to success and being left home alone while their friends are out having a good time will be hard.

Lastly, take your kids to the bank and have a meeting with someone together about the ins and outs of their youth account. Parents should know what is and is not allowed and not assume that simply because they opened the account 8 or 9 years ago, they understand what that account does or does not allow.

Financial planning remains an unpopular pastime, and few enjoy the responsibility of dealing with money. This may have more to do with how out of control Canadians feel with regard to their expenses and how much debt we carry. But as parents we should be looking for every opportunity to teach our children some of the bitter truths about money, debt, banks and budgets. Nobody else is.

As always, if you have questions about fees, performance or your financial future, please don’t hesitate to give me a call or send a message.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared  by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

Down With Universities, Up With Education!

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Let’s say I had an investment that cost around $100,000 to be a part of, and after a fixed period you would be left with debt in the area of 25% of your initial purchase. Also there is less than 50% shot at having any ROI at all. If that sounds like a bad deal that’s essentially the proposition of going to university; an expensive 4 year party that leaves many young Canadians in debt with little chance of landing a job that even requires a degree in the first place, let alone one in the chosen field of study.

In some ways universities have it tough. They have become an outlet for millions of Canadians expecting a good future; the final stop for middle class social mobility. They carry with them all of the unexamined concerns we have about class and status in our lives. They are the primary gateway to white collar high paying jobs. They hold the simultaneously contrarian positions of bastions of independent thought and radicalism while also being expected to turn out thousand of grads ready to work “in the real world.” The demand for this type of schooling is so great and has become so expected that parents begin saving from the minute their kids are born, sometimes at the expense of much needed retirement planning.

Universities don’t always help their cause either. While the number of Canadians (and Americans, Brits, Australians, or anybody for that matter) struggle to both pay off their student debt and can’t seem to find gainful employment, some of the major schools themselves have become sources of ridicule as they deal with less serious, or trumped up issues. Students have had their way at college campuses, objecting, protesting and winning arguments that seem pointless, silly or ridiculous. Halloween costumes were deemed to “triggering” at Yale, and statues of Canadian Prime Ministers were called too offensive at Wilfred Laurier.

But if we look past silly controversies and focus on university attendance as an investment, we can see that returns really are low, and its hard to imagine any other investment we would make that carries with it so much speculative risk. Being smart about secondary education requires a similar mindset akin to being smart about investing. Where can my investment yield me the best return? And while universities can show that simply having a degree does improve earnings compared to those with only a high school diploma, it doesn’t make up for the fact that costs remain high and students are still saddled with too much debt after they leave school.

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Saving for education is but one part in an ongoing series of financial life goals. The purpose of that education is to help set the stage for a productive economic life (so to speak), where an education provide options for meritocratic growth and allow for economic milestones like home buying and raising families. As the education system becomes both too expensive and largely pointless, the knock on effect has been young people deferring other stages of their lives.

For now there is no quick fix for the question of higher education. Since before I was in university, students have complained about the rising costs of tuition and the weakening job market. But the absence of top-down solutions doesn’t mean that parents and students are without options. Education is an investment and it should be treated like one. Parents who take the time to open RESPs, collect the Canadian Education Savings Grant dutifully and invest wisely should not consider their due diligence over once their children begin going to school.

Entering higher education is an ideal opportunity to begin expanding children’s entry into the world of finance, and is an excellent way to reframe the education conversation from one about “passion” to understanding that school is an investment akin to a home. A bad investment will end up yielding a negative return, will cost large sums of money and leave the owner feeling helpless. A good investment is one that will provide both comfort and security, allowing for future ambitions to be fulfilled.

Is your financial advisor at your table, or are you at theirs? We’ve been helping families for nearly a quarter of a century one kitchen table conversation at a time, and we’d love to help yours. Plan for your children’s education, and have us join them and you to discuss their educational options. Give us a call or send us a message today!

 

The Educational Industrial Complex

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It is hardly an original thought to lament higher education in this country. It has been a regular pastime of every cultural critic and an open invitation to people of all political stripes. Students complain that they leave school too indebt with little hope for a job. Liberal critics fear that schools have become too focused on making money, Conservatives complain that schools are too PC, professors worry about their jobs, TAs complain about not having enough money and social activists have a host of complaints, ranging from institutionalized racism to accusations of disinterest in campus rape (itself a dispiriting hotbed of controversy).

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Undoubtedly, the growth of universities and the number of people seeking higher education has been one of the great success stories of our society. Parents begin saving to help their children at a young age to attend a university. Schools are geared largely to getting students into university and in general our society has created an environment that fosters a belief that education is the key to doing whatever you want in life, though statistically whatever you want is more likely to come true if you want to work in a cubicle.

Universities serve many masters, so it should be no surprise that few are happy with it as an institution. But even looking past the general complaints that are directed at post-secondary education, it might be worth at least stopping and asking why we still look to universities as the preferred direction for young Canadians after finishing high school.

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Asking why we do something can be fraught with peril. Sometimes the mere examination of a closely held belief can be perceived as aggressive and asking why something is done can expose the uncomfortable reality that sometimes we don’t know why we do what we do. Nevertheless, the price of a university education and the effort and time that go into receiveing a degree should make us stop and pause: Do universities still serve the public interest?

Consider first the cost. Ryerson estimates that the cost of a single year of tuition for someone living on-campus (the ideal university experience) is between $21000 – $25000 per year, including books and other fees. That seems right, and means that a four year degree could easily cost $100,000 – an exorbitantly high cost given that it is roughly the same whether you study Aerospace Engineering or Philosophy.

We should also consider the job prospects. A study from statistics Canada shows that a full one third of graduates with a humanities degree are over qualified for their jobs. And while the evidence is strong that a university degree will improve your earnings, without a vocational degree like engineering, those earnings will be lower than comparable graduates. Worse, having a degree from a university doesn’t dramatically improve your chances of employment over a somebody with a high school education. On top of all that a study done by CIBC showed that there is a negative return on a humanities or fine arts degree. Some have even argued that having no degree is better than a liberal arts degree!

But perhaps the best way to understand the conundrum of universities is by this fact from the CIBC report. Canada has the greatest proportion of adults with a post secondary degree among the OECD, but those degrees cost double the OECD average and the number of university graduates making less than half the national median income is the largest among the group of countries.

Canadian university enrollment in various subjects - 2005/2006 - Statistics Canada Education Data
Canadian university enrollment in various subjects – 2005/2006 – Statistics Canada Education Data

Some of this can be explained by what degrees are chosen, and also not chosen. But given that a current estimate for a four year degree for a Canadian born in 2015 will be in excess of $120,000 in 2033 (when they attend university) shouldn’t we be asking whether this is the wisest use of resources? Canadian parents of all stripes are busy trying to balance their need to save for retirement and for their children’s education, and judging by some estimates we’re doing a poor job of both.

The most recent statistics on universities from Statscan
The most recent statistics on universities from Statscan

I feel confident in saying that one of the reasons we strive for a university education is that it is connected to ideas we have about both social mobility and social status. Universities were once closed off to general population. Only the wealthiest went on to higher education and the best jobs. White collar work in the city afforded the highest pay and was exclusively the result of a university education. And while I encourage all new parents to start a RESP, I believe that more should be done to shape how we perceive the point of our educational system. Given the financial challenges that all Canadians face, funding an education should not become a pyrrhic victory in a life of financial battles. If the purpose of post secondary education is to improve our economic prospects then we are doing a poor job of it.

Hey, Guess What? Trying to Plan Saving For Retirement & Your Children’s Education? We Can Help! Give us a Call or Send Us a Message!

Super Cool New Device Won’t Fix the Economy

Apple just unveiled its new watch (called the Apple Watch no less) and briefly I watched the stock price climb quickly as the promise of Apple’s great new thing came to life. But before Apple had its big webcast yesterday, I was actually having a look at this nifty thing called NAVDY.

NAVDY seems like a great idea and its one of many many great things that is regularly and constantly being developed by an increasingly connected world that funds great ideas through websites like kickstarter.com. But like many new great things that I see, most of them won’t dramatically change the economy in any significant way. Specifically, none of these new businesses will create a great number of new jobs.

This may seem like a small point to quibble over, however when we look through the prominent industries that tend to occupy the business sections of newspapers, like Apple Computers, you begin to realize that very few of these businesses do much in the way of employment. Improvements in productivity, automation and robotics continue to eat away at an industrial base that forces young people into retail sectors, and an older generation into early retirement.

More people are employed in Canada year-over-year, however it has involved net losses in high employment sectors combined with net gains in high-education sectors.
More people are employed in Canada year-over-year, however it has involved net losses in high employment sectors combined with net gains in high-education sectors. Many of the jobs that employ lots of Canadians present opportunities for automation. Click on the image to view a larger version.
From Stats-Can - the widening gap in unemployment spells. Being employed in manufacturing meant you could be out of work longer in Canada than in non-manufacturing based jobs.
From Stats-Can – the widening gap in unemployment spells. Being employed in manufacturing meant you could be out of work longer in Canada than in non-manufacturing based jobs.

Where there were once middle class factory jobs for thousands of Canadians they are now increasingly rare, and often exist through substantial subsidization from the provincial or federal government.

This story isn’t new. In fact it’s so old now that the first real impact of it dates back to the 1980s. But as time marches on and we are increasingly numb to this reality it may have escaped our attention just how great a challenge this is posing to our society.

For instance, today, Vox.com posted an article about “Why you need a bachelor’s degree to be a secretary“, focusing on how many jobs are “up-credentialing”.

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Industrial decline also plays an indirect role in rising housing markets in cities. It’s easy to see that falling employment in traditionally well paying blue-collar sectors may contribute to higher crime rates and stagnant wages, but it also tells us where it makes the most sense to live. Young Canadians finishing university are unlikely to move back to Windsor when the best jobs are now in Toronto, fuelling a condo boom while raising housing prices across the city to the point of being unaffordable to new families.

From the Economist, January 18, 2014: Briefing: The Future of Jobs - Retail services continue to grow as other market sectors decline.
From the Economist, January 18, 2014: Briefing: The Future of Jobs – Retail services continue to grow as other market sectors decline.

All of this speaks to a larger and more looming issue for Canadians, which is that continued improvements in automation place long term pressure on things like infrastructure and wealth distribution and raise other questions about middle class viability. In other words, we seem eager to introduce new technologies into our lives, but each of these technologies doesn’t just reduce jobs, they reduce jobs that employ lots of people. The January 18th, 2014 Economist ran a frightening story about this kind of automation and that up to 47% of existing jobs could come under pressure by new forms of cost effective robotics and computers.

It’s often hard to see changes that are incrementally slow, but changes are occurring, and over the coming years and decades these changes will likely shake out in ways that we aren’t expecting. But for Canadians looking to save and retire in the future, many of these trends are coming together in worrying ways. In the form of higher educational costs, more limited job opportunities, higher costs of living and potential unemployability, and sadly the new industries and businesses we are quick to promote won’t likely be enough to stave off a society that is undergoing a significant shift in how it employs people.

All of this is a lot to explain in a single article. But if you’d like a simple video that does a good job of scaring you, please watch this video by Youtuber CPG Grey, whose excellent video from a few weeks ago got widely picked up and shared on the web. Otherwise, if you’d like to talk about getting set-up with a savings plan, either for yourselves and kids please give me a call!