How to set your kids up for financial success – Part 1: life lessons

young man in white sleeveless shirt holding brown basketball
“I can’t dunk, but my college fund is SLAMMIN’!”

Growing up, I was lucky to have parents that talked openly about money and taught me the basics of personal finance, saving, and investment. I’d like to share some of the lessons they taught me and pass along some tips to parents who want to start their children off successfully.

If you want to skip the life lessons and teen finance below and go straight to the tactical savings and credit-building tips you can use as early as your child’s birth, check out Part 2.

Talk openly about money with your kids

The best thing you can do for your kids to instill good money habits is to model them yourself. Talk openly and honestly about money with your kids— and your spouse! If you feel too sensitive or embarrassed to talk money with your family, consider hiring a fee-only financial advisor like me to improve your finances and get the conversation started. If money is tight and that’s why the Christmas gifts can’t be lavish this year, being honest with your kids can help them understand and even get onboard with supporting the family’s financial stability.

Be open about money mistakes you’ve made too, and explain what you learned from them. My parents have been successful financially, but I remember them telling me early on how they foolishly bought a condo as a rental ‘investment’ that didn’t work out, and also about an alternative investment they were sold– an oil and gas partnership– that wasn’t profitable. They learned from these mistakes, hired a financial advisor along the way for some one-time advice, and stuck mostly to low-fee stock mutual funds over the years.

Saving regularly and living below their means allowed them to retire early despite being solidly middle class in their incomes throughout their careers. Their formula for building wealth was as simple and reliable then as it is now: save a good chunk of what you earn and invest it for the long-run in a way that minimizes taxes and fees. Do this every year and watch the magic of compound interest grow your investments over time.

I remember my parents showing me on graph paper (pre-Excel spreadsheets!) how the college fund they had started for me had grown exponentially over time, and how small, regular investments from them and my grandparents had added up to tens of thousands when I neared college age.

They also modeled the importance of conscious spending. They cut costs on things they didn’t think were worth it– we never had cable TV growing up, or expensive cars— but spent wisely on the things they loved– we took three trips to Europe as a family during my teenage years, Rick Steves-style.

Education is important

Academic education is just as important as financial education to growing wealthy. Education translates into job skills as well as pro-social behaviors like avoiding crime, drugs, and having fewer health issues. Keep your kids in school, help them with homework, and expect solid grades and effort from them. Praise them for hard work and a job well done, not for natural skills or raw intelligence.

If you’re able to live in an area with good public schools there’s no need to pony up big dollars for private tuition. (Although if you do opt for private K – 12, a 529 plan can help.)

If college makes sense for your child, encourage them to think wisely about their choice of major and the cost of their education. There’s a big wage difference between Political Science and Computer Science bachelor’s degrees. There’s nothing wrong with ‘following your dreams’ per se, but spending $100,000 for a graduate degree in the fine arts is going to be a dumb investment for most people.

Your choice of degree matters a lot more than where you get it. Share that with your child and keep it in mind when helping them select a school. My parents simply handed over my college fund to me when I turned 18 and explained that if I chose my state’s (very good) public university I’d probably have money left over when I graduated, but if I wanted to go across the country to a more exclusive private university I’d need to take on tens of thousands in loans by the time I finished my four years. I opted for the public university, and was very happy with my (debt-free) experience.

By telling me the money was mine if I didn’t spend it all, I had ‘skin in the game’ so I lived frugally by managing my housing and food budget, and graduated a couple quarters early to shave off a few thousand in tuition. I also worked part-time over the summers and some weekends since that just added to what I had for spending or saving.

Your child might think they know exactly what they want to do in life, but temper their enthusiasm or aimlessness with your own experiences and knowledge of their career potential. Let’s be honest: even as seasoned adults, most of us aren’t sure what we want to be when we grow up, so continue to guide your child even when they’re legally an adult.

Health is wealth

Health has a big impact on a person’s finances, so keep your child’s mental and physical well-being in mind. Sports are great for fitness, de-stressing, making friends across socio-economic lines, building confidence and staying out of trouble. Soccer, basketball, baseball, and flag football are all popular and cheap to play. Even sports like tennis or golf that have ritzier social connotations don’t have to be expensive. Skip the private lessons– unless it really matters to you– and enroll your child in inexpensive Parks & Rec or school league sports from a young age. They’ll have a blast regardless of their skill level if you keep it fun and encourage them– and so will you.

I suspect social media and ever-present screens and video games are a dangerous thing for all of us– kids and adults alike– so consider limiting these activities (easier said that done) and ‘age-gating’ your child’s access to social media accounts. Try to gather a coalition of your kid’s parents to agree upon the same rules so your child doesn’t feel left out if they’re the only one without a smart phone or Instagram account at their age. Get them a ‘dumb’ flip phone for emergencies if needed, preferably without texting to avoid distraction and force them to learn to speak to people.

Money basics before they leave home

Open a bank account for your child when they are old enough to understand how money works (age 9, say.) Help them deposit allowance and cash gifts. Teach them how checks work and how to track their balance online. Talk about the tradeoffs between spending and saving. Saving to me in elementary school meant waiting to blow my allowances long enough to buy a video game system or a music player. I think even these deferred spending habits probably led to appreciating the ability to save for something more abstract like retirement.

When they’re old enough, give your child a debit card for their bank account and teach them to use an ATM (and to avoid overdrafting or paying fees.) My favorite bank also has kids’ accounts– an adult needs to be on a kid’s bank account until they reach 18.

Encourage Junior to get a part-time job while in high school. There’s nothing like working in fast food to appreciate the value of higher education or learning a trade… Have them set up direct deposit to their bank account for their paychecks. Open a Roth IRA for them so they can start investing for their retirement. Consider ‘matching’ their contributions from your own funds if they make enough to do so but not enough to do it on their own, and if you can afford to do so. My parents opened a Roth for me when I started my first job at 16, and I’ve been saving ever since. Your child can also set up an auto-budgeting plan like the the Better Tomorrow banking system. This will come in handy when they get their first ‘real job’.

Investing and credit for teens

Teach them the basics on how low-fee, tax-deferred, diversified index funds like a Target Retirement fund will maximize their investment growth with minimum risk and effort.

Now that they have an income to spend, consider getting them a credit card. Teach your child about the high fees credit cards carry and instruct them to never carry a balance. Stress that they need to always make sure they have enough in their checking account to pay their monthly bill before they put something on their card.

Show them how to check their balance, transactions, and how to set up autopay for the full balance as well as opting into paperless statements to get sent to their email (and yours if you’re worried!) Start them with a ‘secured’ credit card to build their credit, if necessary. Get them a cash back card with no annual fee and no foreign transaction fees. Capital One has great choices there.

Check out Part 2 for some tactical tips to build your child’s credit and save for them in tax-advantaged accounts anytime after they’re born! Part 3 covers picking the best bank account for your child.

Author: Ward Williams

Ward is an independent financial advisor at Better Tomorrow Financial. He started working as an independent investment advisor in 2009.

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