6 things you can do today to solidify your children’s financial future
Lindsay Jones
January 3, 2022
When you start having kids, or possibly even before, most financial planners will urge you to start planning early for their future. After all, kids are expensive. Doctors’ visits, childcare, extracurriculars, the designer jeans they’ll demand someday, and, most of all, college. It all adds up.
Even if investing on behalf of your kids now is both smart and necessary, unfortunately, most people don’t have a great plan of action. Not only is it difficult to justify putting aside money you need for current kid expenses, but it is also hard to know where to get started.
Our goal at Fortunately is to make investing simple without losing effectiveness. Below are our suggestions for helping set your child up for financial responsibility, stability, and success. You may not be able to do everything now, but as long as you can make some money moves to get time in the market - which is much more important than timing or total contributions - you will have made strides.
The Early Years
Contribute to a 529 college savings plan
A 529 is a state-sponsored, tax-advantaged plan that allows you to save for your child’s future education. 529’s come in two forms: prepaid tuition plans and education savings plans. Another benefit of a 529 is that other people can contribute to it, making it an excellent way for your extended family to help, should they wish to. As you are setting up your plan, do your research! Don’t over-save (research average expected tuition costs), as the funds can only be used penalty free for specific expenses, and know what you’ll do with the money if your child receives scholarship funding or chooses not to go to college.
Open a UTMA/UGMA brokerage account
A UTMA/UGMA brokerage account, otherwise known as a custodial account, is a brokerage account that belongs to kids under 18 which they will only have access to later - in most cases, when they turn 18. There is no limit on contributions and withdrawals can be made for any legitimate expense at any time. Contributions to this account are made after tax but there are benefits. For example, $15,000 per contributor is gift tax exempt, and up to $1,100 of earnings from the account are federal income tax exempt.
Educate your kids on financial literacy
Apart from putting money to work for your kids, you also need to proactively teach them how to be good financial stewards. Financial literacy is a crucial life skill - and yet it is barely taught in school and often neglected in the home as well. Thankfully, many excellent financial resources exist for kids, from apps, to websites, to games (Animal Crossing, anyone?). The time you spend helping kids establish healthy financial habits now will pay off in spades in the future. It doesn’t matter how much money you put away for your kids if they just spend it. Start with basic financial concepts - save, spend, give - and build from there.
The Later Years
Open a custodial IRA
A custodial IRA is exactly what it sounds like - an Individual Retirement Account opened and managed on behalf of a minor. This can either be a Roth IRA or a Traditional IRA. A child can make future penalty-free withdrawals from a Roth account to use for expenses like college or the down payment on a home. Note that the Roth IRA is probably the way to go for a custodial account given that traditional IRA’s are really tax advantaged specifically for high earners, which is not usually children (more detail here, should you be curious).
Build credit
Many kids go to college without ever having a credit card in their names. While this makes sense - credit cards are dangerous for kids to wield - having no familiarity with credit cards and no history of credit has the potential to do even more damage. Open a credit card for your kids to help them build credit. Kids only have to be 13 years old in order to have their own credit card. Used responsibly, this means they will have 20 years of credit history by age 33! Or, if that prospect is just too scary, consider teaching them financial responsibility with a Greenlight debit card. It won't build their credit, but it will teach them how to use plastic without melting it.
Take their financial literacy to the next level
Some financial concepts are going to be too complicated for the young mind (or the adult mind). As soon as your kid shows an interest and is old enough to master the math, start introducing them to investing. Explain to them the power of compounding. Show them the different options for where they can put their money, from stocks to bonds to speculating on NFT’s. If there is a particular toy or product they are excited about, help them research the parent company - this might be a good opportunity to invest.
Encourage employment
Nothing teaches children the value of a dollar more than having to go out and work for their money. Even if you are financially stable and your children don't “need” to work, they will learn valuable lessons about money. Babysitting and yard work are two hustles for younger kids and, when they are old enough, make them get a “real” job (their ability to do so will depend on your state’s labor laws).
Helping your kids become financially healthy adults is a complicated process, but completing any of the steps above is better than the worst thing you can do, which is: nothing.
Many parents never discuss money with their children, instead letting them navigate the complicated waters of personal finance on their own. Doing nothing is the best way to ensure that your kids end up with unnecessary debt and few tools to fix it. Following these simple steps will provide your child with a solid foundation, both in dollars and education.
Lindsay Jones
January 3, 2022
