Youth accounts today help kids see their withdrawals through an app, manage their budget and save for a desired item. They also allow kids to have their own debit card and for parents to oversee the transactions.RgStudio/iStockPhoto / Getty Images
Most clients open youth bank accounts for their kids well before they turn 18, but some parents are trying different options to teach kids about money.
Terry Wright, portfolio manager with LT Wealth Management Partners at Raymond James Ltd. in Vancouver, says when parents first look to educate their children about money, they turn to a youth bank account to park money from grandparents, an allowance or funds from a child’s first part-time job.
Youth accounts today help kids see their withdrawals through an app, manage their budget and save for a desired item. They also allow kids to have their own debit card and for parents to oversee the transactions.
But if savings in a youth account increase to around $5,000, Mr. Wright says that’s the cue for parents to start investigating other options.
Assuming a registered education savings plan is already topped up, Mr. Wright says an in-trust account is something for clients to consider.
In-trust accounts are set up “in trust” for the child by the parents, who control the account until the child turns 18. Unlike youth accounts, in-trust accounts provide the opportunity to purchase investments, take advantage of compounding and grow money much faster than a monthly interest rate on a youth account’s balance.
“At a young age, the lifetime impact of compounding an extra dollar is massive,” he says. “They can learn about the impact of compound interest.”
Chris Poole, president and certified financial planner with CWP Financial Services Inc. at Sun Life Financial Investment Services (Canada) Inc. in Toronto, opted against setting up youth accounts for his three children.
He prefers in-trust accounts and registered education savings plans, which provide a mechanism for money to grow, compared to youth bank accounts that are more like “a storage locker.”
“When it’s sitting in a bank account and not even generating any interest, it’s actually decreasing in value over the course of time versus inflation, so the spending value of that over time is shrinking,” he says. “Longer term, there’s no real growth.”
He’s had clients set up youth accounts for their kids at an early age and then find themselves accumulating thousands in the account.
“The money has been sitting in the account for years and they want to know what they should do with it,” Mr. Poole says.
Now, when clients come to him about opening youth accounts, his first question is about the goal for the money. Some may want a way for their kids to manage cash flow and learn to set aside a portion of their allowance or paycheque, but others want to grow the money as much as possible.
“Taking that amount of money and putting it away into something else that … isn’t available for short-term spending may be a great way to build that resilience in kids,” he says.
Some youth accounts are adding new features, such as Wealthsimple Inc.’s “parent-paid interest” accounts for teens launching this fall. The accounts allow parents to pay extra interest on their child’s deposits to encourage saving.
Mr. Wright questions the approach.
“Is it going to skew the perspective that kids have when it comes to the rates of return on their money?” he asks. “If the parents are contributing an amount that equates to 100 per cent of their savings rate … that could be the expectation.”
Although several accounts and accompanying apps for kids are available, they don’t replace parents having money conversations with their kids, says Robin Taub, a chartered professional accountant in Toronto.
“Those talks and lessons can start young and build on the pillars of earning, saving, spending, sharing and investing,” she says. “The topics and examples can get more sophisticated as they encounter [specific financial goals] in their lives.”
Some parents don’t make saving a priority for their kids, saying they’ll save later when they make more money and that this is just early-stage income.
“But if we become accustomed to the idea that every dollar that comes in simply gets spent, then we start outpacing our financial capacity with our lifestyle and we learn spending is more important than saving,” Mr. Poole says.