Imagine that Rachel and Tim are each given an 18th birthday present of a thousand dollars by their grandmother. Sentimental Rachel decides to put the money in a savings account. If she does not touch the money and it earns eight per cent interest, she will have $16,000 by the time she is 54 years old.

Tim lives for today. He is just as grateful for the gift, but decides to buy a Playstation and iPod with the money. The rest goes on entertaining himself and his friends. Tim figures he can start saving money later in life. If he earns eight per cent on $1,000 starting at age 36, when he is 54, his $1,000 will be worth $4,000.

At age 54, Rachel will have $12,000 more in her pocket than Tim. This additional money may help her to worry less.

By not touching the gift but banking it right away, Rachel ends up with more money. She not only earns interest on the original sum, but also on the extra amount she receives each year as interest. Each year, she saves more by not spending the interest. Each year, more money is earning eight percent interest. This is a process called compounding. Rachel earns more money each year by doing absolutely nothing.

Of course, this is a simple version of the story. Rachel must pay taxes and find a safe account that can pay this kind of interest. Still, you can see the principle along with the benefits that come from saving early.

Starting smart – teaching kids about money

Help your children learn the value of money. As a parent, you are paving a road upon which they will travel in future. By giving too much, you may create an attitude of entitlement. In other words, your children will think they deserve everything they want. What’s more, you may be expected to provide it. Clearly communicating your values to your children is important.

This may not seem like a big deal when your kids are young. However, once they reach their teens you may regret not establishing boundaries. Learn to say no some of the time. Your children will benefit from knowing they cannot always have what they want.

Saving
For every ten dollars received as allowance, have your child save one. Put aside that ten per cent of the allowance, perhaps in a savings account at first. As your child grows so will the compounding growth of those savings. Teach your child how to manage this money effectively. Start simple. Set goals that can be achieved over the long run.

Responsibility
Attaching financial reward to tasks and achievements is one type of positive reinforcement. For instance, give an allowance for doing chores around the house. If your child wants a certain toy or gadget, you might agree to share the cost but show how to save towards the item.

It is also important to guide your children about how to spend the rest of the money. They must learn to make responsible choices about spending it on clothes, recreational activities or simply having a good time.

Setting up bank accounts
Consider setting up two savings accounts for teens. Only one should be made accessible by bank card. This will help your child learn the concept of saving versus having an account for day-to-day expenses.

If you co-sign a credit card for your older teen, remember that you will be liable for any outstanding debt. Make sure teens understand that the debt will be their responsibility. Kids need to learn how to control their spending. At first, you may ask the bank to place a low limit on the card, not to be raised without your authorization. Request a copy of the credit card statements so that you can monitor the account. In future, new pay-as-you-go credit cards may simplify matters.

Income tax and RRSPs
Having teens file income tax returns has some advantages. First, it may help them start early on a registered retirement savings plan (RRSP). Remember that compounding effect? It is even better, since money in an RRSP is protected from taxes until withdrawn. Your child can also learn about registered retirement savings plans early in life.

Never too late to learn – tips for those over 18

It is so easy to get into debt when you are young. It can take years to get out of debt. The financial strain can affect you emotionally, socially, and in your career.

If you are a student, be wary of signing up for a credit card. Imagine the temptation to have what you have always wanted, right now. It is easy to justify debt, thinking you can pay it back later. Keep in mind how Rachel benefited from delayed gratification.

Delayed gratification means suffering a little until you have the money to buy what you need. Be careful about peer pressure to have the right car, live in a certain neighbourhood or eat at the best restaurants. The price of impressing others may mean a lifetime of debt and unhappiness. Wondering whether phone service will be cut off, whether your car will be repossessed, or how you are going to provide for your family is no fun.

Budgeting
Try to live within your means. This means spending less money than you earn. One of the best ways to do this is to set up a tally sheet. Work out how much you spend and subtract it from how much you earn. Keeping receipts helps with the process. Write the result down in a book daily, weekly or monthly.

If you try this for a while, you may be surprised at how you spend your money. The trouble areas may not be where you thought. Sometimes a slow leak from small purchases can add up to a big problem.

Saving
Try to save a set amount of money each month. Consider putting away a certain amount of money as an emergency fund. If unexpected expenses arise, you will find it less overwhelmed.

Getting out of debt
The best way to get out of debt is to avoid it. However, for many people, this is not an option. Student loans or car payments may be necessary. If you owe money, try to pay it off as soon as you can. The interest rate on loans is usually higher than what you can earn on your money in a savings account.

Pay off your credit card monthly whenever possible. Credit card interest rates are usually very high. Lending institutions make their money on the interest from your unpaid bill. You can save money by paying the bill on time. Unpaid credit card debt is like a high expense loan.

If you have too much credit card debt, get professional help. Other ways exist to pay back such debt at a cheaper rate. Do not feel ashamed about seeking help to get out of debt. It is best to find a solution as soon as possible. Pride can cost you a lot, both emotionally and financially.

A team approach

When couples start out, they learn a great deal about each other. This is also true in terms of finances. Sit down together and outline where each of you stand on debt, savings, spending habits, future plans and financial priorities. Money conflicts can be a big source of marital unhappiness.

Try to respect the other person’s philosophy. If you cannot work through a certain issue, seek financial advice. Attend courses and read books. Talk to accountants and financial advisors, if you can. You may save money by spending money on an expert. The Internet can be a good tool, but use caution. Be aware that fraudulent websites and inaccurate information can be a problem.

Money problems can drain financial and emotional reserves. Protect your financial and physical health by using common sense and getting advice if necessary.

This article is not meant as a substitute for seeking professional personalized financial advice, but is intended for educational purposes only.

Money Matters Your guide to financial health

Money worries can be both emotionally and financially draining. Good money management skills are an important part of regaining control. By learning to manage money, you can prevent and deal with financial stress that may take a physical toll.

Keys to financial health

Starting early

Starting smart – teaching kids about money

Never too late to learn – tips for those over 18

A team approach

Money Matters
Your guide to financial health