Americans rank their finances as the No. 1 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 (it’s required in school curriculums in 37 states), we still have a long way to go. With the month of April deemed Financial Literacy Month, these tips will help children prepare for a financially successful future, and tell parents how they can help get them there.
1. Invest early and often
Saving for the future, whether it’s for a car, a home or retirement, probably seems like the furthest thing on a kid’s mind. But starting early will allow them to experience the benefit of compound interest. This is the “snowball effect,” where interest is earned on money previously earned as interest. When kids invest early and often, they can fully realize the benefits over the long run.
How to get started: If the child is under 18, a parent can open a custodial brokerage account in the child’s name. Invest some of their savings and leave a little remaining on the sidelines in the event of a market sell-off. To incentivize them, consider matching a percentage of what they invest. Index funds are a good way to get started.
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If they are 18 or older with earned income, a Roth IRA is a great choice, as 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, since individuals must earn less than $140,000 in 2021 and couples under $208,000. People under 50 can contribute up to $6,000 per year. But remember, this is a retirement account, and while you can withdraw your Roth contributions at any time without penalty, penalties will apply if earnings are accessed before age 59½.
2. Build good credit
Most of us aren’t taught that good credit starts with borrowing, and that taking on a little debt can actually be a good thing. But buyer beware — credit card companies start with teaser rates, but they can skyrocket to double digits. Remember compound interest? It is awesome for saving, but it works against you when borrowing.
How to get started: When your child turns 18, they should 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, such as Netflix or their cellphone bill. They should then set up the credit card bill to be paid automatically from their bank account. This way, they are building their credit history and will never have a late payment. If your child does not qualify for an unsecured credit card, a secured card is the best alternative. This card will have a credit line secured against their deposit of say $500. They can use it to build their credit until they qualify for an unsecured card. Also, make sure they keep their first card open, even after they open others. The length of any credit history is tied to their oldest card credit card.
3. Borrow wisely
There will always come a time when your kids need to borrow, and it’s important to teach them how to do it wisely. A good credit score will help them get a better rate and pay less interest over the course of the loan.
How to get started: Explain the difference between “good” debt, which is an investment toward our futures (think a mortgage, or student or small-business loans), and “bad” debt, which is credit cards or a car loan. While your child may need to take on debt for education, buying a car they cannot afford or maxing out their credit card is unwise.
When borrowing, shop around for interest rates before buying. Let them know they should never exceed what they can finance with the idea they will get a big raise or another job.
4. Budget, budget, budget
Controlling their spending means assessing where their money is going. Get them in the habit of tracking their spending by building a budget. Having a budget will allow them to realize where they can cut costs to start saving and investing additional assets toward their future.
How to get started: Introduce your kids to budgeting tools, such as Mint or Quicken, which aggregate their accounts and help track spending and give them a sense of where their money is going. It is easy for them to swipe their credit card to pay for something, but when they realize they spent $400 on DoorDash last month, they may think twice before tapping their phone the next time their stomach growls. You can foster this habit early on by giving your kids an allowance for doing their household chores. Help them put together a simple budget so they can learn about money-in and money-out. Encourage them to set savings goals for things like a new video game or a new bike.
5. Understand that splurging is OK, but ALWAYS live below your means
There are a lot of things kids spend money on without even realizing it. Think overpriced lattes, new cellphones, designer clothes, Hulu, etc. — it all adds up. While kids can treat themselves occasionally, make sure their spending isn’t controlling them. If they cannot pay down their credit card every month, it means they are living beyond their means.
How to get started: Encourage your child to take a step back and assess what really matters to them. Before swiping their credit card, they should ask themselves if they really need said thing. A great way to teach kids this lesson is to encourage them to take on a summer job. Having their own money will give them an opportunity to make their own spending mistakes and learn from them. They can treat themselves once in a while, when they deserve it, and more importantly, only if they can afford it.
6. Realize that investing isn’t gambling
In recent months, we saw a real frenzy when some traders tried to play casino with the markets. However, kids need to understand that investing isn’t gambling. I’m not opposed to allowing someone to play trader with a small portion of their savings — say 10% — but as an adviser I will make it clear that it is not my decision, but theirs. Gambling means you could lose everything. Sometimes it’s a good lesson learned.
That being said, the recent frenzy shouldn’t dissuade them (or you!) from the markets. I understand this can make investing appear daunting and uncertain, however, it’s important to think long-term. The market will always have its ups and downs, and while there are no guarantees, our market has always come back.
How to get started: If you open a custodial account or Roth IRA for your kids, you should involve them in the investment process. Let them choose a few companies they care about to invest in, and you’d be amazed how interested they’ll be. You can review annual statements with them so they can see the progress of their savings and investments.
7. Keep an emergency fund
As the pandemic has shown us, we never know what the future holds. Millions of people lost their jobs and have spent months looking for new ones. Your kids should learn the importance of always having a separate fund that will cover six months of their expenses or liquid alternatives they can tap into in the event of an emergency. They will soon become young adults with expenses such as their credit cards and rent that will come due. Having an emergency fund will serve as a safety net. It’s also important that kids know the difference between investments and their cash. Have them set aside some cash for everyday living expenses and larger upcoming purchases.
How to get started: Take your child with you to the bank and open up a savings or money market account for them. Every time they get cash for a holiday or birthday, bring them back and have them deposit a portion. This will foster savings as a habit instead of a chore.
Financial Literacy Month shouldn’t just be one month — its importance and relevance are seen and felt every day. And as parents, one of the biggest gifts we can give our children is responsible money habits that last a lifetime. Consider a solid financial literacy foundation as one of the legacies you are leaving your kids (and grandkids!). In doing so, you’ll enforce positive change in your family and in the world.
ALINE Wealth is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, and with Hightower Advisors LLC, a registered investment adviser with the SEC. Securities are offered through Hightower Securities LLC; advisory services are offered through Hightower Advisors LLC.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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