If it seems that there is constant negative press about Generation Y and its ability to survive in today’s economy, you’re right. It’s a lot tougher out today for young people to make it financially. Tuition fees are extraordinarily high and continue to climb. Home prices in the Lower Mainland are pretty much unaffordable for most people, and retirement will likely be a thing of the past by the time your kids and grandkids reach age 65. No matter how bleak things look, you still need to encourage them to budget and save. If you are able to, help them financially, albeit responsibly.
Generation Y: Tips from a Financial Advisor on How to Help
1. Give Generation Y money to help them save for their education.
If you are financially able to, direct any child benefits or gifts of money your child receives into a Registered Educational Savings Plan (RESP). Show your kids the power of savings by letting them see their RESP statements and encourage them to put babysitting monies, or other income earned into it. It’s important they help to contribute to their education costs.
Often aunts, uncles, grandparents & family friends give cash as gifts to young kids and continue the giving cash well into their teens. This money often is wasted on fun and frivolous things. Why not ask the parents to set up a Registered Educational Savings Plan (RESP) for the child and request any monies you give be put into this education fund. You can even ask for a receipt of purchase. Whatever monies you give annually will also receive the Canadian Government Grant of 20% on the amount deposited up to a maximum of $500 grant annually. In addition, there are other grants the child may qualify for that is based on the family’s household income.
2. Start saving early.
Time is a huge factor in building any type of savings. Encourage your young adult kids or grandkids to save and start the process early. Twenty-five dollars a month directed towards savings may seem like nothing but if you do it consistently month by month and year over year increasing it as your financial situation improves you will have saved ‘something’ and ‘something’ is always better than nothing.
If your kids or grandkids are earning an income working for you and have a social insurance number direct some of those earnings right into an RRSP for them. If they are younger, they will likely spend their earnings frivolously. There may not be a tax advantage by contributing today. However, they can use the contribution at a later date when there earnings are higher but they will get the benefit of tax deferred compound growth right away.
3. Just save!
Don’t focus on encouraging saving for retirement to Generation Y. Just encourage saving!
Thinking about retirement at age 20 is almost ridiculous. Especially for a generation that will have a way different experience of what retirement is or will look like than their parents’ and grandparents’ retirement. So don’t discuss saving for retirement with your twenty-something year-old. Just encourage them to get into a good habit of saving.
Generation Y should build a personal nest egg for whatever financial goals lay ahead. Encourage them to invest as much money as they can into an RRSP each year ‘just’ for the tax rebate. This is free money from the Government to persuade us to save! They can take that rebate and either put it back into the RRSP to get more free money next year and continue to build on their savings or look at paying down some high interest debt.
RRSPs can be much more valuable to Generation Y than just future retirement income. They may help with a down payment on a home (Home Buyers Plan) or fund education for a period of time (Life Long Learning Plan). Both Government plans offer a period of time to pay back the monies into their RRSP’s without incurring tax penalties or you can include the withdrawals as income on your tax return and pay tax at whatever bracket you are in.
Your Generation Y child or grandchild may have a disability at some point in life and have to take a leave from work or decide to stay home to raise kids. If they are in need of a bit of extra income they have their RRSPs to withdraw from. They shouldn’t have much of a tax burden (depending on the amounts they withdraw) and assuming they are in a low tax bracket to begin with. Remember when you take monies out of your RRSP you have to include as income on your tax return and pay tax at your marginal rate. So don’t take money out for frivolous purchases.
4. Help with building up the savings. If you can.
If you’re the parent or grandparent of an adult child and want to help build their savings beyond just the RESPs here are a few ideas. If Sally or Jimmy are still living at home in their 20s and possibly 30s and are working, make sure you charge them rent. If you can afford it, put that rental income into an account earmarked for them. When the adult child is ready to move out and possibly buy a place of their own you have helped them to save a down payment already. Don’t let them know you have put that money aside so they have to learn to budget to find the extra monies to put towards their savings goals. Then money you have saved will just be additional help.
You can encourage them to set up an RRSP and direct part of the monthly rent into it (hopefully they are financially responsible enough not to touch the funds as they will own the plan). If grandma and grandpa still give cash gifts or want to give a lump sum gift to help out they can also look at RRSPs for longer term savings or a Tax Free Savings Account (TFSA) for shorter term goals. Both have to be opened in the adult child’s name and have contribution limitations. Your financial advisor can best assist with this.
There are many ways you can help your Generation Y child or grandchild financially. The best thing you can do is teach and mirror good savings and spending habits.
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