Americans rank their finances as the number one cause of their stress. Not surprisingly, there is also a lack of financial literacy in this country. And while financial education programs are on the rise (they’re mandatory in school curricula in 37 states), we still have a long way to go. Since April is known as Financial Literacy Month, these tips will help kids prepare for a prosperous future, and tell parents how they can help them get there.
Saving for the future, whether it’s for a car, a house, or retirement, probably seems like the most important thing on a child’s mind. But starting early will allow them to take advantage of compound interest. This is called the “snowball effect”, where interest is earned on money previously earned in the form of interest. When kids invest early and often, they can fully realize the long-term benefits.
How to start: If the child is under 18, a parent can open a custody brokerage account in the child’s name. Invest some of their savings and set aside some money in the event of a massive sell-off in the market. To entice them, consider matching a percentage of what they invest. Index funds are a great place to start.
If they’re 18 or older and have earned income, a Roth IRA is a great choice because the growth is tax-free. Roth IRAs are funded with after-tax dollars, while traditional IRAs are funded with pre-tax dollars. A Roth is a good choice for young professionals, as individuals should earn less than $ 140,000 in 2021 and couples less than $ 208,000. People under 50 can contribute up to $ 6,000 per year. But keep in mind that this is a retirement account, and while you can withdraw your Roth contributions at any time without penalty, penalties will apply if you access income before age 59. and half.
Most of us don’t learn that good credit starts with borrowing, and that getting into debt can actually be a good thing. But beware of buyers – credit card companies start with teaser rates, but they can skyrocket in double digits. Remember compound interest? It’s great for saving money, but it works against you when you borrow.
How to start: When your child turns 18, they will need to open a credit card in their name that is linked to their bank account. Have them set up automatic billing for a small recurring payment, like Netflix or their cell phone bill. They should then set up the credit card bill to be paid automatically from their bank account. This way, they build their credit history and will never have late payments. If your child is not entitled to an unsecured credit card, a secured card is the best alternative. This card will have a secured line of credit against their deposit of, say, $ 500. They can use it to build their credit until they qualify for an unsecured card. Also make sure that they keep their first card open, even after opening others. The length of any credit history is tied to their oldest credit card.
There will always come a time when your kids will need to borrow, and it’s important to teach them how to do it wisely. A good credit rating will help them get a better rate and pay less interest over the life of the loan.
How to start: Explain the difference between “good” debt, which is an investment in our future (think of a mortgage, student loan, or small business) and “bad” debt, which is a credit card or credit card. car loan. While your child may need to take on debt for their education, it doesn’t make sense to buy a car they can’t afford or to max out their credit card.
When you borrow, check the interest rates before you buy. Let them know that they should never go over what they can fund with the idea that they’ll get a big raise or another job.
Controlling their spending means assessing where their money is going. Get them used to keeping track of their spending by budgeting. Having a budget will allow them to realize where they can cut costs to start saving and investing additional assets for their future.
How to start: Introduce your kids to budgeting tools, like Mint or Quicken, that consolidate their accounts, help track spending, and give them a sense of where their money is going. It’s easy for them to swipe their credit card to pay for something, but when they realize they spent $ 400 on DoorDash last month, they might think twice before tapping their phone the next. once their stomach growls. You can encourage this habit early on by giving your children an allowance to do their household chores. Help them create a simple budget so that they can learn more about the inflow and outflow of money. Encourage them to set savings goals for things like a new video game or a new bike.
There are a lot of things kids spend money on without even realizing it. Think overpriced slats, new cell phones, designer clothes, Hulu, and more. – it all adds up. While kids can indulge themselves on occasion, make sure their spending doesn’t control them. If they can’t pay off their credit card every month, that means they’re living beyond their means.
How to start: Encourage your child to take a step back and assess what really matters to them. Before they swipe their credit card, they should ask themselves if they really need this thing. A great way to teach this lesson to children is to encourage them to take a summer job. Having their own money will give them the opportunity to make their own spending mistakes and learn from them. They can indulge themselves once in a while, when they deserve it, and more importantly, only if they can afford it.
In recent months, we have seen a real frenzy when some traders have tried to play casino with the markets. However, children need to understand that investing is not playing. I am not opposed to allowing someone to play trader with a small portion of their savings – say 10% – but as an advisor, I will clarify that it is not my decision, but theirs. Gambling means you could lose everything. Sometimes that’s a good lesson learned.
That said, the recent frenzy shouldn’t deter them (or you!) From the markets. I understand that this can make investing intimidating and uncertain, however, it is important to think long term. The market will always have its ups and downs, and although there are no guarantees, our market has always returned.
How to start: If you are opening a custody or Roth IRA account for your children, you should involve them in the investment process. Let them pick a few companies they want to invest in, and you’ll be amazed at their interest. You can consult with them the annual statements so that they can see the evolution of their savings and investments.
As the pandemic has shown us, we never know what the future holds. Millions of people lost their jobs and spent months looking for a new one. Your children should learn the importance of always having a segregated fund that will cover six months of their expenses or liquid alternatives that they can draw on in an emergency. They will soon become young adults with expenses like their credit cards and rent falling due. Having an emergency fund will act as a safety net. It is also important that children know the difference between investments and their money. Ask them to set aside money for daily living expenses and larger upcoming purchases.
How to start: Take your child with you to the bank and open a savings or money market account for them. Whenever they get money for a vacation or birthday, bring them back and ask them to drop a part. This will promote saving as a habit instead of a chore.
Financial Literacy Month shouldn’t just last a month – its importance and relevance is seen and felt every day. And as parents, one of the greatest gifts we can give our children are responsible financial habits that last a lifetime. Consider a strong foundation in financial literacy as one of the legacies you will leave for your children (and grandchildren!). In doing so, you will be forcing positive change in your family and in the world.