Stay focused on these four strategies to set your kids up for a life of wellbeing and freedom.
Let’s stop waiting to give our kids money or their inheritance until we die. At that point our kids have gone through financial struggles whether by recovering from a failed business, drowning in student loans, or divorce. If we start giving our children their inheritance now, they will be better off emotionally, mentally, and financially.
Here are four strategies that I’m using to set my kids up for a life of wellbeing and freedom.
Answer all money-related questions.
Recently my husband and I came home with a new TV. Our old one has been broken for months. My 6-year-old asked me how her dad and I bought it. I kept answering wrong, so finally, she said “how did you get the money?” I finally understood the question. I explained to her that we saved money. She said “where”, “how?”
I took the time to explain to her about savings accounts and investments. By the time we were done my 7-year-old had joined in and they both said that they wanted to invest.
My 7-year-old is getting a $5 increase in her monthly allowance when she turns 8. She voted to invest the $60 extra that she would have received this year. So, I opened a custodial account for her.
My 14-year-old is also getting a $10 monthly raise this month and asked me to invest it. Since she does some babysitting, I decided to open a Roth IRA for her since we can claim $120 for work earnings. If all goes well, my husband and I will be matching that contribution around her birthday or Christmas.
Children are naturally curious. Take time to instill healthy money habits now. Review their investment accounts with them when you make a deposit or yearly. Make sure that they know the names of the funds that they are investing in.
Give children an allowance starting at age 5.
The recommended amount is $1 per year. So, a 5-year-old will receive $5 weekly. You need to look at your family, your life, your budget and decide how much you want to give to your children. It is different for every family. The key is to be consistent.
How often should your children expect payment? Weekly, bi-monthly, or monthly. You can ask them for their preference.
I recommend giving your children the minimum amount and not tying it to chores. They get the money no matter what. If your children feel that you are not giving them enough then they can do extra chores around your home or earn better grades for a bonus. My children have chores around our home.
What happens if they are rude, don’t do their chores, or get bad grades? They lose privileges like hanging out with friends, no television, and/or must pay the person who did the chore for them.
Allowance was introduced by letting them know that they would receive money monthly. They could spend that money on whatever they want. We explained how parents would continue to buy essential items like food, clothing, and shelter. However, they would have to use their money for special snacks, meals, gifts for friends, and other non-essential items.
This has worked well so far. They are kids so they do spend their money fast, but on occasion, I have heard them say that they are saving for a big item. Since they are paying themselves first and investing the money, they end up with is for them to use as they please. Once it runs out, they know that they have to wait until their next allowance distribution.
If they have a big financial goal, sit down and help them make a plan.
Get to know your kids and learn about what gets them excited.
I am not only talking about traditional school subjects here: math, science, history, language arts. I’m talking about building skills that will help them in what they are doing now.
What don’t I have to tell them to do repeatedly? Sports? Music? Cooking? Animals? Find out what it is and invest in their development in those areas.
You can sign them up for summer camps that focus on these areas. Hire coaches to support their skill development. Purchase quality tools and equipment to perform at a high level.
As caregivers, it is your responsibility to nurture these areas. Children won’t ask you for this because they don’t know that it exists.
That is why it is important that you also teach them about financial literacy. Teaching my children about financial literacy is like teaching them how to cross the street safely. It is not something that I need to take initiative to teach for their own well-being. Financial literacy can be taught at home by being transparent about your finances. How do you make money and spend money? How do we make financial decisions? Where do we keep your money? Do you have a budget? Show it to them.
Open funds for your kids and start investing in their future now.
Tell them what they are invested in and how their investments are performing.
My goal is to have a 529, Custodial Account, and Roth IRA for each of my kids. Maybe not a 529 for my youngest. She can use whatever is leftover from my other kids. Another goal is to have a home for each of them to use later in life as an investment. So far, they are funding the Custodial Accounts and Roth IRAs with their own money. My goal is to match their yearly contributions. Except for the 529. That will be funded at a higher level by myself.
The reason that these accounts are being set up now is that when they become adults, I want them to be accustomed to saving/investing part of their income. If they continue to do so they will never have to invest large sums. They can keep their investments low until they retire. Whatever age that may be. By the time they are 30, they can possibly reach Coast FIRE if they have enough invested.
Many caregivers steer away from Custodial Accounts and Roth IRAs because children will have access to the money once they turn 18. That can happen.
If they decide to cash out and blow the money, I won’t be distraught or have any regrets. It will be a lesson for them just like I learned by doing. They will have time to build a cushion again.
By consistently implementing these four strategies your children will leave home with a solid financial wellness foundation. They will make mistakes, but they will recover fast.