Kids and Money

It is so important to talk to your kids about money.  I love it when my clients bring their kids into my office to meet with me and talk about money.  Sometimes kids will listen to me about how to save and invest money rather than their mom or dad.  It is important to talk to kids of all ages about money so that they are on the right track for their financial future.  Here are a few ideas of how you can help your kids with money.

“Family 401(k)”

A great way to start talking about money is a “family 401(k)”.  With a “family 401(k)”, you as a family come up with a goal for your money; you as a parent can offer a matching program as well.  The goal could be a pool, a trip or a new “toy” for the family.  So, for example, you put money in and then if your daughter puts $1.00 into the family “401(k)”, you could match her 50 cents.  This way she can learn about “401(k)’s” so when she starts her first job she understands the concept of the “401(k)” and will sign up right away.

Roth IRA for your child

If you have an enterprising son or daughter who has earned income through an after-school or summer job, you can help them open up an IRA.  Your kids are eligible for the Roth or Traditional IRA as long as they have earned income.  When setting up the account, a parent or another adult will be asked to cosign the paperwork accepting legal responsibility for investing the child’s money.  Once established, you and/or the child can contribute an amount equal to his or her income, or $5,500.00, whichever is less to the IRA for the year.  Opening an IRA not only encourages your child to save more, but you can also help him or her choose from a wide range of investment options and track their progress over time. Of course it is important to remember that money planed in the IRA may be subject to taxes and tax penalties if withdrawn prior to age 59 ½.

Give an Allowance

Many parents often wonder what they should do when it comes to giving an allowance.  Giving an allowance can be a great opportunity for teaching important financial lessons.  Even very young children can begin to understand the concept of earning money.  Explain to your child that money is earned by working and that you can only spend what you earn.  To help your child understand what it is like to get paid on a schedule, begin paying your children an allowance.  Help your children set goals for how they spend and save their allowance, making sure that you as parents stick to the payment schedule.  Otherwise, the lesson may be lost. 

You can start an allowance at an early age.  As soon as your kids start talking about money, you can use the time to teach them valuable lessons.  Once you decide to give your kids an allowance, you want to be consistent with the amount and frequency.  I find most parents have success starting with one dollar for each year the child has been alive. So, if you have an 8 year old, do $8 a week or $8 a month.  Whatever fits with your budget.  Help your child divide the money three ways.  1/3 of the money save for the future, 1/3 of the money to share with a charity or organization, and 1/3 of the money to spend on whatever the child wants.

A child’s wants and their monetary value need to be immediately distinguished from needs. This is one of the foundations to a healthy financial education!

Wants vs. Needs

A great way to set goals is to get a piece of paper and draw a line down the middle, write “wants” on the top of the left side and “Needs . The next time your son or daughter asks for an item or money, ask your child which side of the piece of paper it should go , under needs or wants, and then write it on there. Kids truly need to recognize the difference between needs and wants. If you want to play a fun game with your family, grab one of the Sunday Target or Wal-mart flyers. Cut out several pictures like toilet paper and a Barbie, toothpaste and a new video game. Have them paste these items under needs and wants all by themselves. Talk over each item and give positive reinforcement when the answer is correct, “Yes! That video game is definitely a want.” When they paste a toy item, or something that truly isn’t a need under the need column, explain WHY their decision might not be wise. The next time you are at a store, bring the paper with you. Have them point to items in the store and clarify whether they are needs or wants. You may find this process also helps YOU decipher between what you absolutely must have and what you can do a week without. You might be able to save enough in your budget to get one of the bigger “wants” in the future, like a vacation.

We are sometimes so focused on teaching our children valuable lessons that we forget we also need an opportunity to learn once again. I encourage you to start today with just one of these suggestions and see the impact you make in your life and the next generations.

Nicole is a registered principal with LPL Financial. For more information visit www.prosperwell.com. Securities offered through LPL Financial. Member FINRA/SIPC.