Last updated on April 16th, 2022 at 05:18 pm
Parents can have a tremendous impact on their children’s future if they start their kids on the road to financial success now. Regardless of your financial status, you can help your children avoid the pitfalls you may have encountered and get an excellent start toward financial independence in the future. Why wait, young children, are impressionable and will listen to adults until they don’t. You can become their financial advisor.
The first step you can take is to discuss the value of money and how it works. Where did you learn these things? The school of hard knocks probably. Few parents discuss financial stuff with their kids and even fewer discuss it with their adult offspring. It’s a good idea to start with a discussion of financial responsibility.
We are all set adrift after high school or college to work learn and often the hard way how to manage money. Don’t let your kids suffer these disappointments and I do not mean just give them money.
How your kids can earn money for what they want to buy
Start with how they can earn money for things they want to buy. Create an allowance system or payment for chores. Explain that the money the kids receive should not all be spent entirely on “stuff”. Talk about alternatives to “stuff” like saving. This is a hard concept to get across. Children may see their parents decide to buy something because they like it. Tell an 8-year-old they have to save to buy things they want and hear their reasons why they should have them now.
Depending upon the age of your children, your approach will vary. Young adults may be open to more conversation about opening an investment account. Talk about student loans and how they can affect their life in the future. The interest rate is a factor in all credit situations so cover how that works. Starting at a young age, your children may amaze you with their comments. I will bet that you wish you had this type of talk with your parents at an early age.
Their first credit card
Children these days rarely use cash. They need money on a credit card to buy through Amazon or even at the school vending machine. Giving a card to your young children and discussing with them their spending limit is a good training tool. Rather than give them a credit card, you can give them a debit card that looks like a credit card. You load the card online with the amount you want them to have.
Greenlight – The debit card for kids, managed by parents. (Affiliate LP)Click the link above for a great program that a family member referred me to. Greenlight offers a debit card that parents control. There are reports that you can use with your children to teach them about where they spent their money, how much is left and when they get more. There is a reward program, savings element, and all of the tools you need to teach your children financial discipline in a fun environment.
Kids can’t spend more than they are allowed with this system. What a great way for you to budget as well as your children. They can even deposit funds they earn from elsewhere and eventually graduate as adults into a checking account and even a good credit rating.
Avoid the bad credit situation later
The biggest drawback for young people getting a good start is their failure to manage their first credit card. Eventually, your child will acquire a credit card, and following what is now the norm, they will end up with a big balance. Young people starting with bad credit scores because of the way they handled their first credit card is the main reason why young families cant buy houses.
If part of your child’s goal down the road is to obtain an education, find a place to live, marry and have children, they will need good credit. I can’t tell you how many people I have worked with who have bad credit simply because they never learned how to manage money. Not just credit cards but car loans, checking accounts, and student debt.
Parents simply leave financial education out of the growing-up equation. When your children can have anything they want by asking, there is little point in trying to educate them about finances. One time I was speaking to a 10-year-old relative about doing a job (folding papers) to earn some money. She told me that her daddy gives her everything she wants so there is no need to earn money.
Create a Roth IRA for your children or grand children
One day I invited my grandsons to my office and told them he could earn money by stuffing plastic bags into an envelope. He had to discuss the financial aspects with the office manager because it was her job to get done. She agreed to pay him the same hourly rate that the employees were receiving. He thought that was fair. He started his job.
I took him to lunch and told him we only had an hour because that was the schedule for his type of work. He was to buy lunch with the money I gave him as an advance on the job, and he agreed. We looked over the bill and agreed on a tip then left. He went back to work.
At the end of the day, I took him to my house and we repeated the same thing the second day (he was on summer break). At the end of the second day, I said it was time to settle up. Using his time card, we calculated the amount he earned. We multiplied the hourly rate by the number of hours he worked.
It was time to discuss the real world finances
When we arrived at a total due to him, I created a column for deductions. He asked what they were for. I told him that everyone that works has to pay for things like Federal Income Tax, State Income Tax, Social Security, disability insurance, medical insurance co-pay, and deductions for 401k. I listed each deduction e.g. 7% for Social Security etc. I used 6% for the 401k match.
When we were finished, the amount remaining was about 60% of the total. I pulled out cash and paid him. He could not get over why he was not paid the entire amount. We discussed this topic that evening and into the next day.
Seemingly from a dream, he came to me and said he had no idea that his parents had to work so hard for so little that the government took so much.
He then asked me what the government does with all that money. I am not going into this discussion now but suffice to say, he told me that he would not approve of X, Y, and Z which were topics of the news at the time because that was his money. I was as proud as one could be. He got it. I was following my advice “Start your kids on the road to financial success now”.
Time to start your kids on their Roth IRA
Completing my story above, the money that I separated for the Roth IRA was 6% of his total. I told him of a wonderful thing his employer was offering (me), a 100% match of his 6%. In other words, his employer gave him free money just to save. Free money impressed him. The next thing we did was open a custodial Roth IRA and I deposited the 12% into the Roth IRA.
In the end, I gave him the money that I had deducted and he decided to put it into the Roth IRA. Wow. This lesson went very well so to continue it, I had the statements mailed to his house and continued to encourage him to make deposits from birthday gifts and other earnings.
Sign Up For Our Investor’s Kit And Build Wealth The Right Way For Years To Come!It’s never too early to open a Roth IRA for your kids or grandkids. Getting them to continue to use it is the challenge. I showed my grandson a table that showed what $100 per month deposited into the fund would yield at age 70, he was amazed.
Encourage you kids to contribute
You can set up the account so your child will not have access until a specific age e.g. 25. The idea here is to encourage them to continue to contribute. If they already have a Roth IRA, they can still open a 401k plan at work. If they open a 401k plan without a Roth, they can not open the Roth until they are no longer eligible to contribute to the 401k.
The link above to the IRA club may be helpful. You can open a Roth IRA for your children or grandchildren that is self-directed directed”. This custodial account means you are the trustee or another family member. An adult over 18 must open the account. This means you can invest in almost anything.
Most IRA and 401k plans permit selections from a limited set of equities. With this plan, you can invest in not only equities but real estate. Remember, you are setting them up on a plan that they can use as adults.
CREATE A BUDGET
The program above with Greenlight helps children budget. This is a skill that will serve them well in later life. You can also download a free budget template from Microsoft for use in their spreadsheet. Create a fake budget as if they were an adult. Do this for your teenagers. Explain all of the items they have to budget for including gifts, car repairs, fuel, insurance, utilities, etc.
This can be a shock for some teenagers who have no idea what their parents must pay every month to keep the household going. Better to shock them not than later. I recall when a close relative (shall remain nameless) called me the day after she moved out of the house and into an apartment with a girlfriend. She said they received this bill for electricity and why would she get one. I explained that every property gets one and someone has to pay for it. Just because she did not pay it at home, her parents did.
A few days later she called about the water bill. I told her the same story. A couple of months later, they gave up the apartment and moved in with her friend’s parents. This is what I mean about not being prepared to face the world in a financial sense.
PARENTS, TEACH YOUR CHILDREN ABOUT MORE THAN THE BIRDS AND BEES
Some high schools have courses on home finances but they as far as I know are not well attended. Perhaps because the kids do not seem to think they need the information. Remember those predatory mortgage loans of 2008-2010 that were all over the news? The news was wrong. These were not predatory loans, they were loans given to adults who after being presented with federally required documentation signed that they understood the process. They did not.
This exposed at least me and I am sure many others that adults had no clue about how to buy a house when it came to the financial aspects. With the millions of dollars the federal government spends to provide booklets on the subject, it’s a bit too late. Children should be taught by their parents the value of their word. Many were not taught by their parents that when they signed on the dotted line and agreed to repay the debt, they had an obligation to do so.
Not only do most adults not understand finance, but some also are not in sync with society. Their bond is important for their future. They simply can not bind themselves to debt without understanding the debt, and how and when they will repay it. Parents, start educating your children early. Teach them the value of money and the value of commitment. Our entire society revolves around shared beliefs e.g. the person driving on the right will stop at the red light.
WHAT TO DO WITH MONEY THAT IS SAVED
Several options exist for the best use of savings. Of course, when the amounts are low, they can remain in an ordinary savings account (within a Roth IRA). As the amounts grow, they should be moved to at minimum certificates of deposit. Then when there is something significant e.g. $500, it’s time to consider equities or a money market. It’s not too early to explain how the stock market works to children over about the age of 10.
Using your Roth IRA to gain the maximum yield from investments will take some time but that time is worthwhile when educating your children. Companies offer stock and bonds to the public so they can raise money to fund expansion and projects to earn more money for the same shareholders.
I know that when my Grandson and I bought his first EFTs (low-cost exchange-traded funds), it included Apple. He had an apple phone so I was able to tell him that he owned part of Apple. He was impressed and told his friends.
SELF DIRECTED ROTH IRA CAN TRANSFER FUNDS TO YOUR BROKERAGE
Select a brokerage to use for the purchases of your equities. The self-directed IRA will transfer the funds or buy what you tell them to buy for you. The way this works is that your savings go into the self-directed IRA then to the brokerage then to the company that is being bought.
It’s a good time to use real-world examples such as going to the grocery store. The best way to educate is by example. Teach your children good habits and save for a rainy day. The idea is that they should not spend everything they earn at one time in one place.
Explain how money earned from household chores can be the start of financial stability. This term may be over the heads of young children but older children will catch on. Get them on the right track
early in life. Perhaps you can go over your financial situation. Not that you have to share your income but tell them where the money goes each month. The hardest thing to teach is delayed gratification
Delayed gratification
.Choose at least one individual stock for a company that your child likes related to something they own e.g. Apple. Put the remainder in ETFs. There are many articles about how to invest which may be good reading. Keep in mind that your child has many years to go so they can handle more risk than someone in their 50s.
Motley Fool is a company that helps people select equities and other investments. I have used them for years and one of their mutual funds has consistently generated great returns. They are not a broker, they provide a fee-for-service program where you buy the equities based upon their recommendations. Check out the link below. If you are new at selecting investments their program may help you.
A Full Year Of Recommended Stock Picks Now 60% off this article was intended to provide some insight into how a parent or grandparent can start their child on the road to financial independence. It does not intend to provide financial counseling and any decisions made by the reader are theirs entirely. The financial services included are not endorsed by this site but rather offered as a place to start your search. Our research has indicated that they are creditable providers. Should you engage with any of the financial services indicated, RetireCoast may receive compensation to help offset the cost of maintaining this site.
DO YOU NEED FINANCIAL PLANNING HELP?
We have an article on this site about financial planning that may be helpful if you need financial planning advice for your situation. I was thinking while writing this article, that perhaps the reader may feel a bit inadequate explaining to the kids something that even they are not sure about. If you have a financial planner, you may want to ask that person to assist with your children. This may be the perfect opportunity to introduce a teenager with a part-time job to the process.
Please read our article about teaching financial literacy to your high school student not only at home but as part of the school curriculum. Financial institutions are helping schools with course materials and planning. Some schools permit clubs to form to invest and financial planning. Students make their own decisions in the clubs and learn good financial habits.
There are fairly simple aspects of financial planning and many adults have stumbled into them over the years. Savings, checking, credit cards, and other similar topics fall into the realm of financial planning. Another of the many articles on this site about financial issues is one about how you would use credit cards, click here to read it.
Check back with us for more articles about aspects of financial planning. Please go to the top of the right-hand column and subscribe to our site. Please provide comments to help us help you. If you are planning to relocate or purchase your retirement home check out this site.
