As a parent, you play a crucial role in your children's financial education.
Saving and investing for your children is essential, especially if you want them to go to college or you want to help them establish or expand a business. But saving and investing with your children can give them another important education. By showing them how to manage their money, you help them prepare for a self-sufficient, responsible adulthood.
SET AN EXAMPLE
One of the best ways you can teach good financial discipline is to set a good example. Remember that kids learn by seeing and imitating, so if you want them to budget, save, and invest, do it yourself. If instead they watch you make impulse purchases on credit, it's unlikely they'll take what you say about living within your means to heart.
But if the way you spend demonstrates that responsible spending is the result of planning and care, not impulse, your children will be more likely to take your other lessons about money seriously and live that way themselves.
Some parents involve their children in managing the family's finances so they know how much money is coming in every month, how it is being spent, and what financial choices have to be made. Their views on what's important may even help you revise your financial priorities.
START YOUNG
Letting children make decisions about money at an early age can help them grasp the concepts of earning, spending, saving, and investing.
To learn to manage money, a child needs some money to manage. One way to illustrate the concept of budgeting is to give each child three clear glass jars that represent current expenses, short-term savings, and long-term savings. Some parents add a fourth jar, to encourage a regular donation to charity. In addition to illustrating different uses for money, this approach is also an early lesson in keeping money decisions transparent: any money that's moved out of saving or giving into spending will be immediately obvious. As an added benefit, it's also easy for them to watch their savings grow.
To decide how much goes into each jar, create a budget together, based on an allowance you provide each week or month. The amount will depend, in part, on their ages and what you expect them to pay for with the money.
There are ways to get started, so find the one that works for you. You might decide on a percentage of their allowance for long- and short-term savings and put the rest into current spending. Or you might start with current spending and put the rest into savings. If the first approach doesn't seem to work, try another one.
AN ALTERNATIVE TO SPENDING
If your children have money left over at the end of the week or month, you can discuss their options. Is it a windfall that they can spend on things they want right now but don't really need? Or would it be smart to move it over to short- or long-term savings?
To provide an incentive to put money in the long-term savings jar, you might offer a matching contribution — perhaps putting in 50 cents for every dollar the child reallocates to saving. When the child is old enough you can replace the short-term jar with a savings account and the long-term jar with an investment account.
Some banks offer children's accounts that don't have service fees for small balances, and other financial services companies make it possible to invest small amounts every month if you have the money directly deposited with a debit from your checking account.
VERY LONG-TERM SAVING
If your children are earning taxable income, including money you pay them to do work for you, you can encourage them to establish a traditional or Roth individual retirement account (IRA). The maximum deposit is 100% of what they earn, up to the annual limit that Congress sets, though they can put in whatever percentage of their earnings that they wish.
If you can afford it, you might give them money to deposit, equal to the amount they earn and allow them to spend or save their earnings in a taxable account. You can explain that even though retirement may be 50 or more years away, contributing this early gives them a real head start on long-term financial security.
Kids can also contribute to a Coverdell education savings account (ESA) that's set up with them as a beneficiary. You can investigate how that works with one of the financial services companies that act as custodians for these accounts. They tend to be the same firms that offer IRAs.
SETTING UP ACCOUNTS
Since a minor — someone younger than 18 in some states and 19 or 21 in others — can't own assets in their own name or control their money, you'll have to be involved.
Some banks allow parents and children to have joint savings accounts and sometimes joint checking accounts when the child reaches a certain age. From a legal perspective you control the money in these accounts, but you can allow your child to make the decisions. The same may be true for credit accounts. In that case, the child uses a card linked to your account.
You can establish guardian accounts, where you are the owner and you manage the money as you see fit. Taxes are due at your rate on any earnings in the account, and you have the right to change the beneficiary of the account if you wish.
In a custodial account, the child is the owner of the assets and has the right to assume control at majority. You control the account until that point, and longer if the child agrees. Any taxable earnings in the account are taxed at the parents' rate until the child is 19, or 24 if a full-time student. You can't change the owner of the account and any assets in the account must be used for his or her benefit.
IRA accounts are established in the child's name and become his or hers at majority. You are the trustee of the account and control it until that point. The investment decisions you make must be in the best interest of the owner.
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