How to Teach Your Children About Financial Independence

In a recent survey, nearly every teen and parent agreed that teens need financial knowledge to achieve their life goals.

If you are a parent, I need to seriously ask: what are you doing to make sure your teen soon launches into adulthood with a solid understanding of how to make smart financial choices and avoid the most costly mistakes?

                                                                                

It’s the rare high school that includes any meaningful personal finance education. And I don’t want to hear that schools should provide that education. I agree with you, but it’s irrelevant. Your teen needs that education right now, and it saddens me that so few parents are stepping up and providing the lessons.

                                                                                                    

A survey by the Financial Educators Council reported that nearly 6 in 10 of today’s young adults said neither parent taught them much about money when they were growing up. And just 1 in 4 of those now young adults said a parent(s) taught them the skills to be “very prepared” for financial realities.

For those of you with teens right now, I am asking you to stand in your truth: Are you providing your child with the guidance and lessons today that will enable them to avoid costly financial mistakes as adults?

Some thoughts:

• Teach budgeting.
  
  Giving a child a debit card linked to your checking account, or access to your credit card doesn’t teach them anything except that they can spend, and you will pay.
  
  If you give a teen an allowance, set up a new checking account where you and your child are joint owners of the account. The only money in that account will be money you deposit into it. It can be every two weeks or every month. But make it long enough so your child starts to think about how to make the money last until the next deposit. As part of this, lay out what you expect them to pay for. Clothes? Meals out?
  
  If they run out of money (by the way, do not sign up for overdraft protection on this account) before it’s time for your next deposit, that’s their problem, not yours! You’ve got a fantastic teachable moment on how to budget and plan. But this is to be a positive lesson. No blame, no shame. Your kid did nothing wrong. The only problem is a lack of experience. That’s why learning when the stakes are so low is valuable. Make it a positive lesson.
  
  I would not introduce a credit card into the mix until they have a solid grasp of living within their means. Once you do add a credit card, it is your stand in the truth moment to teach them about spending on needs, not wants. You must clearly spell out when it can be used, and what your expectations are for their contribution to paying for their charges.
  
  
• Encourage work for pay.
  
  A recent survey found that barely half of teens today have a job, while more than 8 in 10 of their parents had a job by the time they were 18.
  
  I think there’s so much upside to encouraging a teen to have a part-time job. For starters, there is much to be learned in a workplace about responsibility and navigating different personalities. A job also teaches the invaluable lesson of how money is earned, not doled out by the bank of Mom and Dad. To say nothing of getting an education early on in the difference between what you earn and what your after-tax pay is.
  
  
• Get them rolling with a Roth IRA.
  
  If your child has earned income from a job, they are entitled to contribute to a Roth IRA. If your child is a minor, it will need to be a custodial account. Not all brokerages allow this, but Fidelity and Schwab do.
  
  Now I want to be clear: I don’t expect a 16 year old to funnel all their after-tax earnings into a Roth IRA. My thought, if your budget can absorb it, is to offer a child a matching contribution. Maybe for every dollar they contribute, you will contribute $5 or $10. Or $20.
  
  There is just one IRS rule to be aware of. The combined contribution from parent and child can be no more than the child earned in that tax year. For example, if your child earned $2,000, the combined maximum amount you and they can contribute to an IRA is $2,000. In this example, if your child contributed $200 to the IRA, you could add up to another $1,800.
  
  And then the fun begins. This is where you teach your kids how jealous you are of the fact that they have so many more years for their IRA to benefit from compound growth. You can use the free compounding calculator on my website to see how that money may grow over time.
  
  The calculator asks you how many years you want to save. I suggest you base it on age 70. Have your kid take a spin, and for the rate of return, consider plugging in 8%, which is a reasonable long-term return assuming they will invest in mostly stocks. Then have them run the calculator again, based on how many years you have until you are 70. That’s an eye-opening lesson on how time is your greatest advantage: The sum they could have by 70 will be a lot more than the sum you could have by age 70.                                                                                                    
• Set college expectations by age 13.
  
  College is incredibly valuable, but only if you and your child choose a college that is a great financial fit. And that starts with having clear-eyed conversations at least five years before college on what you as a family can afford.
  
  Do not leave this conversation for later. That’s part of the reason why student debt is such a crushing problem for so many. People borrowed with the best of intentions—an education!—without carefully considering how much they could truly afford to borrow.
  
  Parents should never borrow if it means they will not be able to stay on pace with their retirement savings. Students should borrow no more than what they can reasonably expect to make in their first year of post-college work. If that means focusing on schools where your family will get the best financial aid offer, rather than a kid’s “dream school” so be it. I have news for you: the more affordable school will be their dream if it means they emerge from college without crushing loans. They might not thank you for the lesson at 13, 14, 15. But just be patient. At 23, 24 and 25 they are going to be so grateful.