Your Financial Future: Teaching your kids about money
Teaching children about investing is an excellent way to educate them about finance and the importance of starting to save early. The child could learn many valuable lessons from this investment and gain useful knowledge of how markets operate. This could better prepare them for the financial challenges that lie ahead.
Most people learn their first financial lessons from their parents. They observe budgeting and spending habits. Do you pay cash or charge everything? Is there a lot of financial stress in the family? Do you have enough emergency money?
Schools do not do a good job of teaching financial literacy. This could be a great time to do so at home as we prepare for back to school. It will enrich your children or grandchildren’s lives. A lack of financial education affects many people throughout their lives, creating a lot of needless stress and lost sleep.
If you have a teen and own a business, consider hiring the child for part-time work. They must actually do something of value for the business. Maybe they can clean up around the office, stuff envelopes or have their photos featured on your website.
You can pay them a fair wage for doing so. They can pay taxes on their earnings and contribute to a Roth IRA. Under current tax law, they may contribute up to $6,500 a year ($7,500 for age 50 or older). There are some phase-outs for higher income. Since this is earned money, it should not be subject to the “Kiddie Tax.”
The Roth could be invested in a growth company that they think might increase in value. The growth would be tax-free as long as they have it for at least five years and they reach age 59½. While that might seem like a long time, think how much it can grow over time. Albert Einstein called compound interest the eighth wonder of the world because of exponential growth funds can obtain over time. If they can continue to contribute every year, the balance could grow to a large sum by retirement time. If plans change and access to the funds is needed, the contributions can always be withdrawn tax-free, since they were paid when the money was contributed. Only the earnings would be taxed. These funds may also not be considered in the FASFA college financial-aid formula.
Taxes are very likely to rise in the future due to the large government deficit. This would make the elimination of future taxes very desirable. The Roth would continue to grow tax-free. Too many people end up with most of their savings in qualified accounts, which can create a future tax time bomb. Tax diversification is a lesson many of us could benefit from.
Teaching finance basics, such as how to balance a checkbook, is also important. Has this ever happened to you? You are purchasing an item at a store, the cashier rings up the sale and tells you the price is $5.23. You hand the cashier a 10-dollar bill, which they punch into the register. As they are ready to give you your change, you ask if you can give them a quarter to avoid getting so much change back. The cashier is totally confused.
To help teach your family, email me at gary@BoatmanWealthManagement and I will send you a “Life Guide, Money Doesn’t Grow on Trees…Teaching Kids About Money.”
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”