Money can feel mysterious and overwhelming. Teaching your children and grandchildren about earning and saving when they are young can set them up for a lifetime of better financial decisions.
Here are six ways to give them a head start:
#1 Start with an Allowance: Tie an allowance to chores to teach kids the value of earning money. It also provides a tangible way for them to practice saving, spending, and even sharing. Start small and gradually increase the amount as they get older.
#2 Introduce Saving and Compounding: Start with a simple piggy bank for younger children and explain the value of putting money aside. For older kids, introduce the concept of compound interest and show them how even small amounts saved regularly can grow over time. Some ideas to consider:
- Savings Accounts (Joint or Custodial): These can be set up at a bank, are federally insured, and terrific for teaching basic saving habits.
- Certificate of Deposits (CDs): These accounts hold a set amount of money for a fixed period, and in return, the issuing bank pays an interest rate.
#3 Teach Budgeting: Demonstrate how to categorize spending into “needs” and “wants.” This can be as simple as helping your kids/grandkids decide if they have enough money for a new toy and a treat, or if they need to choose one.
- 529 Plan: Did they receive money for a birthday or graduation? Teach them about long-term financial planning by explaining how money saved specifically for college or other qualified education expenses can grow. While the child won’t directly manage this account, contributing to a 529 plan (which offers tax advantages when used for qualified education expenses) on their behalf can be a tangible way to demonstrate saving for significant future goals.
#4 Have Family Financial Conversations: An open dialogue about money doesn’t mean sharing every detail. Involve them with discussions about grocery budgets, vacation planning, or even saving for a big family purchase.
#5 Explain Investing: Introduce the concept of investing to older kids and teens by explaining what stocks, bonds, and mutual funds are, and how they can help money grow over time. Consider opening an account to gain hands-on experience and spark a lifelong interest in investing:
- Custodial Accounts (UGMA/UTMA): Set up by an adult (custodian) for a minor beneficiary. The money or assets are irrevocably the property of the minor, but the custodian manages it until the child reaches the age of majority (typically 18 or 21, depending on the state).
- UGMA (Uniform Gifts to Minors Act): Allows for financial assets like cash, stocks, bonds, and mutual funds.
- UTMA (Uniform Transfers to Minors Act): More flexible than an UGMA, it allows a wider range of assets including real estate, intellectual property, and even collectibles in some states.
#6 Get Creative: Do you own a business? If your child is earning income from your business (or any legitimate job), you can explore setting up a Roth IRA for them. This offers a fantastic combination of tax benefits, financial education, and long-term wealth building. Contributions are made with after-tax dollars (from their earned income), and qualified withdrawals in retirement are tax-free. This teaches them the power of tax-advantaged investing from a young age.
By taking these steps, you’re not just giving your kids and grandkids money; you’re providing hands-on experience to manage their finances responsibly and create a solid wealth building foundation.
If you’d like to discuss any of these ideas in more detail, simply reply to this email to schedule a time to talk.