Yahoo Finance FP Answers: What are better ways for my 15-year-old son to invest than risky crypto and tech?
By Julie Cazzin with Andrew Dobson
Q: I’m setting up an investment portfolio for my 15-year-old son to teach him about money, investments and saving. He fixes bikes, cellphones and small appliances in our garage on weekends, so he will be contributing 10 per cent of his earnings every month plus 10 per cent from any monetary gifts he receives. I will also be contributing $100 a month to his fund. What are some investment vehicles that we should consider given the timeline? We are open to including exchange-traded funds (ETFs) and international investments. And how do I deal with my son’s huge willingness for risk? He’d like to invest in cryptocurrency and tech stocks. I’d like something a little less risky. Help. — Rafael
FP Answers: Teaching your son how to manage money at a young age is a great way to help him avoid mistakes as he starts to earn income and pay his own expenses, Rafael, and saving 10 per cent is a reasonable amount to use as a starting point.
Canada’s household savings rate was 5.1 per cent in the third quarter of 2023, according to Statistics Canada , which is about where it has been over the past generation. Saving 10 per cent would leave your son 90 per cent for discretionary income and hopefully establish a habit he can carry into adulthood.
The trap here would be that if he gets used to spending this amount of his income on discretionary expenses on a regular basis, he may have a hard time when he starts to have actual bills to pay. So, 10 per cent may end up being low as a savings rate. Setting a realistic budget at the onset, especially since this is the first time he is doing it, may help in the early stages of this new discipline.
Additionally, you could help him achieve some “real world” experience by offering a matching program rather than a flat $100 per month. For example, like group retirement and savings plans that are found at many workplaces, you could offer to match the money he saves himself. You don’t necessarily need to match the 10 per cent. It could be a 50 per cent match, for example, which is a common approach taken by many employers.
Before determining the investment vehicles to choose, I would consider how and when the money will be used in the future. Investing as a young person can be a lot different than it is for adults with concrete, material and predictable goals. A young person’s need for the savings can be much more variable.
It may be suitable for him to invest some of his portfolio in the higher-risk assets he is asking about, such as cryptocurrency or tech stocks. Since he has an interest in this type of investing, it may help keep his attention focused.
The risk with using vanilla ETFs that have broad global diversification is that they can be boring for a new investor. Part of the excitement of managing investments for the first time can be to test the waters and try different ideas. The problem with taking this approach is that if his time horizon is only a few years for post-secondary education, a car or other expenses, cryptocurrency and tech stocks could be way up or way down when needed.
Since your son is 15, he will not be able to open a tax-free savings account (TFSA) or first home savings account (FHSA) for another three years. He can open a registered retirement savings plan (RRSP) and since he has earned income from his repair business, he will start to accumulate contribution room if he files a tax return. This is one benefit to filing a tax return for a teenager, even though they will not generally owe tax unless they earn more than $10,000 in a year. The combined federal/provincial basic personal amount tax-free threshold varies by province and territory from as low as $8,481 to as high as $15,705.
If your son wants to invest in securities such as stocks, bonds or ETFs as you have indicated, you will have to open an “in-trust” account in which you would legally manage the account with your son being the income and capital beneficiary of the investments.
From a tax standpoint, I would make sure you consider the income attribution rules for the account. For example, if you provide a matching contribution to his savings from your sources, you may be subject to income attribution on the interest and dividend income that his portfolio generates. This means that income should be taxable back to you.
On the other hand, capital gains are not attributable between parents and minor children, so there could be value in reviewing what types of investments to buy with a tilt towards capital gains. An easier solution might be to set up multiple accounts, one for his contributions (not subject to attribution) and one for the amounts you provide (subject to attribution).
It sounds like your son is off to a great start if he has found a way to earn money on his own and now wants to put some aside for investing. Giving him some input and being mindful of the tax implication are both important, but try not to be too overbearing and turn him off.
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It is also OK if he takes a bit of risk, even if it does not work out well. Mistakes with small amounts of money early in his investing journey may help him more in the long run than they will hurt him.
Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at adobson@objectivecfp.com .
