Up your kids’ ‘FIQ’ – Financial Intelligence Quotient

June 24, 2012 • Financial Literacy

Do you have a child heading off to college or university in September? It’s a time of life when everything is new and challenging, and for most students that includes managing their own money. You may want to alert them to a couple of key danger areas – spending more than they can afford and abusing credit cards.

Keep a budget

The best way for a student to begin to control spending is by keeping a budget. If you can get that message across, you will have given your child the best possible tool for her or his financial education.

As a simple budget exercise, students should:

  • Keep every receipt.
  • Record all expenses by category, such as food, books, cell phone, transportation, clothing, entertainment, rent, etc.
  • Total the expenses at the end of each month.

Tracking spending makes it easier to separate fixed and necessary expenses, like text books or a meal plan, from discretionary items, like fast food and pub nights. With this financial record, students can ask: “Where am I spending more than I can afford?”

Budgeting helps students distinguish between things they need and things they want. They can learn to think before they spend and, over time, see their new spending habits positively reflected in their monthly tallies.

Use credit cards wisely

In the credit world, students are unique. Who else can have no income, yet still qualify for a credit card? Here are the top three credit-card mismanagement mistakes made by students:

  • Treating their credit card limit as “found money,” maxing out their cards and running up debt.
  • Making only the minimum monthly payment, adding to interest charges and increasing their debt.
  • Using their card for cash advances when they’re short on funds and running up interest charges right from the date of the advance.

As a parent, what can you do? Let your child know about the consequences of abusing a credit card. Students need to understand that using a credit card may not feel like they’re spending real money, but they are. In fact, they’re spending more than they may be expecting if they also pay the high interest rate on an unpaid balance.

Try suggesting to your child to keep an ongoing list of credit card purchases. Tracking purchases may help to control spending and avoid a nasty surprise on the monthly bill. Maybe your child will go for the idea of only using his or her credit card when really needed – for emergencies or to make online purchases of necessary items, such as textbooks. Encouraging your child to start of with a low credit limit is another way to help avoid unnecessary spending.

We all make mistakes

Managing money is a learning process. Don’t be surprised if your child needs your help to cover a $100 phone bill. Try to make it clear, however, that you expect it not to happen again.

In the end, it’s all worth it. If you get your child started on the right track, you can instill good habits that will last a lifetime.

Making RESP withdrawals

After years of Registered Education Savings Plan (RESP) contributions, Canada Education Savings Grant (CESG) deposits and plan growth, the day arrives to take money out. How do you go about it? Here’s what you need to know about the rules surrounding RESP withdrawals.

There are two kinds of RESP withdrawals:

  • Educational Assistance Payments (EAPs). These payments include CESG grants and plan earnings and are taxable to the student as long as he or she is enrolled full-time at a qualifying post-secondary institution. You can withdraw up to $5,000 of EAP in the first 13 weeks of school. Afterward, there’s no limit.
  • Post-Secondary Education Capital Withdrawals (PSEs). These represent the amounts you originally contributed to the plan. You can keep them yourself or give them to your child to cover post-secondary expenses. Because the capital you originally contributed was taxed before you contributed it to the plan, no tax is payable when it’s withdrawn.

If your child will be attending university or college in the near future, talk to us. We’ll help you determine what to withdraw and when, and make any necessary adjustments to the investments in the plan.

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