4 Things you can do to help your grandkids today
Traditionally, inheritances have been passed on to the next generation, but as Canadians are living longer than ever, that train of thought is changing. Many people realize that if they live into their early 90’s, that means their kids will likely already be retired.
Because of this, more retirees are looking to help their grandkids as it will have a much larger impact on their lives.
Here are 4 ways to help your grandkids today
1. Open an education account
The cost of post-secondary education continues to rise every year. For the 2020/21 school year, the average tuition increase at the University of Manitoba was 3.75%. With costs continually rising faster than inflation, many students take on a boatload of debt to earn their degree.
If you’re able to offset some of these costs for your grandkids, they’ll be in a much better position financially when they start their working lives. This will allow them to:
- Start saving for their first home
- Start saving for retirement
- Start in the black rather than the red.
The best way to save for your grandkid’s education is through an RESP account. The primary benefit of this account is the 20% matching contribution from the Canada Education Savings Grant. The funds in the account also grow tax-deferred, which means you won’t have to pay any tax on any gains, interest, or dividends generated.
Once the funds are withdrawn from the account, any tax owing will need to be paid by your grandchild, who is going to school. They will likely have little to no income, which means there would be minimal tax due.
For additional info on RESPs, click here
By opening an education account for your grandkids, you are also indirectly helping your own kids as well. That’s one less thing that they need to worry about, and they can focus on paying down their mortgage or saving for their retirement.
If your grandkids are already enrolled in a post-secondary program, it will be too late to open an RESP, but you can still help them by giving them funds to pay for their tuition.
2. Teach them what you know about personal finances
In my opinion, one of the most significant failings of the education system today is the lack of focus on personal finance. Instead of learning about TFSAs, RRSPs, Credit Card Debt, and Mortgages, kids are taught many things they will never need to use.
Thus, students are graduating high school with no idea how the financial system works and often make easily avoidable mistakes.
Giving them money is one thing, but giving them the tools to make good decisions is even more beneficial. If you’re not comfortable giving them advice yourself, perhaps your financial advisor would be willing to sit down with them to go over some key concepts.
Some good books to teach your grandkids about personal finance include:
You might need to include an incentive to get them to read these as it’s hard to compete with video games, sports, friends, and social media.
3. Help them with their mortgage
The biggest impediment to purchasing a home is coming up with a downpayment. It can often take years to build up enough cash to put the required minimum of 5% down as house values continue to rise.
By providing them with funds for their downpayment, homeownership can be realized sooner. This means they can start building up their own equity rather than paying rent or living at home with mom and dad.
If your grandkids already own their home, providing them with some funds to apply to their mortgage would also help. That would free up cash that they can redeploy to other areas such as child care or for their retirement.
4. Promote Saving & Investing
As Albert Einstein famously said, “Compound interest is the 8th wonder of the world.” For compound interest to be effective, it has to be compounding on a large number.
If you make 5% on $1,000, that’s only $50. However, if you make 5% on $1 Million, that’s $50,000, now we’re talking.
By promoting saving and investing to your grandkids, you can help them build up their nest egg today to take advantage of the snowball effect.
The snowball may be small initially, but if they add to it over the years, it will start rolling down the hill and growing all on its own.
One strategy that is highly effective is a matching program. For example, a dollar for dollar match on any amounts added to a savings or investing account.
This will encourage your grandkids to save as they are essentially doubling their money on anything they contribute. In addition to the funds they are saving, it’s also a good time to introduce to them how investing works. By getting comfortable with investing at a young age, it’s a great opportunity for them to learn how it works, which will pay off as they get older.