How To Achieve Financial Security For Your Children’s Future : Do This Now
Just like with everything else in life, financial Health is easier to maintain than to obtain. As parents, securing a strong financial foundation for our children will put them on a path to financial success before even leaving the nest or obtaining their first job. While financial literacy is incredibly important (teaching your children about finances) there are practical things you can do as well.
While not completely determinative, it would make sense that children follow in their parents financial footsteps. As such, keeping the household finances in order is likely the most important way to protect our children’s financial health.
Parents should ideally get out of debt (live within your means), obtain an appropriate life insurance policy (10 times your annual income), a will (contact a local attorney) and have an emergency savings (3 to 6 months of expenses).
The financial stability of the household is imperative to intergenerational wealth building and provides a clean slate for your children to grow from. By ensuring our own financial success, we provide a real life example for children on how to appropriately handle their own finances in the future.
Also important to children’s financial future is for parents to take the necessary steps to ensure that they will be able to sustain an appropriate lifestyle through the entirety of their life without having to rely on adult children financially.
According to an AARP survey, 42% of midlife adults expect to have to regularly support their elderly parents financially and 51% midlife adults are concurrently financially supporting their own adult children still. Talk about unreasonable financial burden!
Once you have a plan in place to achieve financial security for yourself, you may consider the following additional options to setting your children up for financial success in young adulthood.
Open A Custodial Savings Account
Having a piggy bank for random cash is definitely a fun activity but the reality is that physical money in the house will get spent and likely on things that do not last long. This can be used for spare change but for larger amounts of money, a better approach would be to open a custodial high yield savings account. At present, it appears 0.05% are the top rates.
Then, every time your child receives a monetary gift for their birthday, holiday or special event/milestone you can place that money into their savings account.
For example, if your child receives just $250 per year and that money is then placed into a savings account, your child will have a total of $4,500 in their savings account (without consideration of interest) when they graduate from high school.
As another example, if you choose to place $1,000 in the account every birthday (or you could place $83 per month), your child would have $18,000 (without interest) in their savings account by the time they turn 18 and graduate High School.
This continued effort can also help to bring forth conversations about the importance of saving money and how to plan financially for the money they have saved.
Save For College, The Basics of a 529 Plan
The entire goal of the 529 Plan is to begin saving for your child’s education. There are 2 types of 529 plans, a prepaid tuition plan and an education savings plan. There is at least one 529 plan offered in every state. For more basic information on the 529 plan options, read from the U.S. Securities and Exchange Commission here.
If you want to know more about the potential advantages of a 529 plan, this article from Fidelity was easy to read with useful information. Fidelity laid out the fact that with the 529 plan you have more control over the money and there are less restrictions with how much money you can contribute.
For example, Fidelity talked about how you can now use up to $10,000 per year on qualified educational expenses even prior to college and that, “at the college or graduate level, funds from a 529 plan can be used for tuition, fees, books, supplies, approved study equipment, and room and board for a full-time student at an accredited institution.”
It has become abundantly clear that student loan debt is a heavy burden preventing people from realizing financial success and causing some to file bankruptcy. If you have the ability to begin putting away money, which will gain interest over time, to avoid your child taking out student loans, this will put them in a more advantageous position post college.
Once A Child Earns Income, Open a Roth IRA
A custodial Roth IRA account has many benefits but your child can only contribute the lesser of $6,000 or their taxable income for the year. Even if your child earns $8,000 a year as a child model for example, they can only contribute $6,000 of that earned income to the Roth IRA that year.
In addition, according to Investopedia others can contribute to the Roth IRA as long as the amount of the deposit into the Roth IRA does not exceed the amount of income earned by the child. So if you want to match your child’s income up to $6,000, you could deposit $6,000 into their Roth IRA and then have them put a percentage of their income earnings directly into a high yield savings account for example.
Ultimately, once they are ready, they can use the money for their education, a first home or continue to save it for retirement. For more information on opening a custodial Roth IRA, the best article I found on the topic was from Investopedia.
Build Their Credit Score
The length of credit history is an important factor to anyone’s credit score. Another aspect of ensuring they have a strong financial foundation is to help them learn about and build a strong credit score. This may include obtaining a secure credit card for your child or adding your child as an authorized user on your credit card. Read more about obtaining a credit card for your minor here.
By introducing a credit card to your child you can teach them how best to use it so that they are responsible. Ideally they will learn that they should not be spending beyond their means with credit cards.
Another option to building their credit score is for you to cosign a lease or loaned vehicle per CNBC’s article. If you were already going to get your child a car, it makes sense to have their name on the vehicle and help them build their credit at the same time.
Considering financial stress is among the top concerns for adults, perhaps we should really consider how to improve not only our relationships with money but also better position our children financially.