Budgeting, healthy spending habits, long-term savings goals — these are all skills adult children should understand and practice on their own. Yet, a recent study found that 40% of empty nesters are still acting as a financial support to their adult children. Supporting grown children harms their ability to learn important money skills, and also puts parents' retirement funds at risk. To raise financially independent children, it is vitally important to discuss the value of money, and how to manage it, at a young age.
For many parents, knowing the right time to introduce financial planning to their children is tricky. How does a parent teach their 4-year-old that buying a bag of candy at the grocery store means they can't go to the movies? How does a parent instill in their teenager that saving a portion of their paycheck each week now will benefit their retirement, decades from now? These questions, and so many more, make teaching children the importance of wealth management a daunting task.
Below, KerberRose breaks down how to easily introduce spending habits, budgeting, and comprehensive saving with your child to put them on a path to financial stability.
1.) When they start to ask about money, tell them. There's no handbook on when is exactly the right time to sit down and begin explaining finances to your child; however, if your child begins to ask how much things cost or if they can have an allowance, take this as an opportunity to start conversations about money and personal finances. Generally, children grasp the ideas of spending and saving when they realize their favorite things — video games, ice cream, clothes — all cost a certain amount. Don't be afraid to have these discussions early-on, as they will set the foundation to an understanding of wealth management your child will carry with them throughout life.
2.) Establish an allowance with a pay grade. Instead of simply giving your child a set allowance each week, assign a dollar value to a task or chore based on its difficulty and desirability. For example: washing the dishes for a week might earn $5, while doing yard work could earn $8. This creates the idea that a child is earning their allowance and certain, perhaps more difficult tasks, provide a greater return. An incentive-based allowance plan with a pay-grade establishes for your children they earn money for the effort they give — which might make them think twice about how quickly they spend it.
3.) Use an envelope budget system. Give your children envelopes to keep track of the money they earn for chores. Tell them adults must divide paychecks between bills, and they should do the same to keep track of spending. Each week, help your children set their own budget and confirm they follow it: one envelope for treats, one for activities, and another for saving. This will teach children to budget their expenses and ensure all are covered.
4.) Set up a savings account once they land their first job. Now that your child is familiar with working to earn money, he/she should also learn how to save it. Open a savings account utilizing the strategy of the envelope budget system: your child should understand part of their check is for fun, and the rest needs to be saved for the future. Putting away half of a paycheck might not seem important to your children now; yet, when they attend college, plan to buy their first house or think about retirement, your children will appreciate they already have a head start. Custodial Roth IRAs are a great option for parents to introduce their children to saving. These accounts require a child to meet certain income requirements and compound interest over time; yet, all investment decisions are still managed by a parent, and parents can even consider matching a child’s contributions.
5.) Split the cost/responsibility of college. Instead of paying 100% of college costs, pay a portion. Agree to pay for tuition if your child covers room and board. Another option could be to divide the cost in thirds between the parent, child, and financial aid/loans. It may seem tough to place so much responsibility on your child, though your child will thank you later for educating them how to handle their personal finances.
By sharing these tips, KerberRose hopes to help you set a foundation for self-dependence and financial success with your child. If you would like more information on how to set-up a financial plan for your family, please contact KerberRose Wealth Management and schedule a meeting with one of our trusted advisers.
References:
55Places. (2019, October 3). Survey Reveals Empty Nesters Still Supporting Children Financially. Retrieved from https://www.55places.com/blog/survey-reveals-empty-nesters-still-supporting-children-financially.
