Teaching kids about money should start at a young age, most schools don’t offer personal finance classes, so it is mostly up to parents and caregivers to teach children how to manage their money.
Financial independence comes by teaching them lessons throughout their childhood so that by the time they are ready to start life on their own they have the skills and knowledge to manage their finances responsibly.
Give Them Some Independence
While you are still supporting them consider an allowance for completing tasks and chores assigned to them. When they have an “income” they learn how to manage money and live within their means. Make them responsible for some of their own purchases and explain how budgeting works including the consequences of overspending.
Savings Account
You should start a savings account for your children the day they are born, throughout their childhood they should deposit part of their “earnings” into the account. When they are young this could be part of their weekly allowance, money they receive for birthdays and Christmas or for extra jobs they complete. Implement a policy that a certain account of any money they receive must be deposited into their account. This teaches them to save and not spend everything they earn. When they are older keep it up, if they have a part-time job a portion of each paycheck should be deposited into their savings account.
Checking Account
When they are old enough help them setup a checking account, make it a joint account so you can help them manage it.
Emergency Fund
Every adult should establish an emergency fund, this is money set aside in an easy to access high-yield savings account that is separate from your other accounts. It is used for unpredicted expenses such as home & car repairs, medical bills, or loss of income. The goal is to have 6-12 months’ worth of income set aside. So, if you make $500/month, you should have $3,000-6,000 saved in the account. Once your child is working establish this account so they can start making deposits.
Help Them Establish Credit
When your child is old enough consider adding them as an authorized user on your credit card if you have a good credit score. This is a way for them to build credit. When you use your card, it will be reflected on their credit report as well as your own. You don’t need to give them access to the card.
Before adding them as an authorized user call your credit card company and ask them if they report authorized users to the credit bureaus. Not all credit card companies do, and you want to be sure yours does so that your child is benefiting from being an authorized user. Also check with the three major credit bureaus, Experian, Equifax and Transunion and find out what their policy is for authorized users. They might not include the authorized user’s activity on their credit report if they are under a certain age or their policy states otherwise.
Consider getting them their own credit card, many banks offer low-limit student credit cards that can help them establish a credit history and build a healthy relationship with debt. Teach them how to responsibly use a credit card. Explain to them what interest is and that a credit card should be used as a tool to establish and build credit and to earn rewards points. Stress to them that it should be paid in full each month to avoid paying interest and accumulating debt.
Freeze Their Credit
Go online to Experian, Equifax, and Transunion the three major credit bureaus. Create an account for yourself if you don’t already have one and show them what a credit score is, explain to them how to build good credit and why it is important to have good credit when purchasing a home or car, applying for a credit card or just opening an account with a utility company or other business. Teach them the importance of placing a credit freeze at all three credit bureaus. Identity theft is a major problem and freezing your credit is one of the best ways to protect yourself. When they are old enough help them create their own online accounts with each agency.
Turning 18
Turning 18 comes with a lot of new rights, such as the ability to vote, rent an apartment, sign up for utility services and much more, but this transition also means parents and guardians lose certain rights to private information. If you child is still living at home or they are in college, there may be certain things they want you to have rights to.
Health Insurance Portability and Accountability Act (HIPAA): Prevents others from having access to your healthcare information unless you sign a HIPAA release, health care providers cannot share anything about your child’s health with you, even if they are still on your health insurance unless they sign this form.
Family Educational Rights and Privacy Act (FERPA) authorization: If your child is a student, they must sign a FERPA release to give you permission to access their educational records. This includes college health records, which are not covered by HIPAA.
Health Care Proxy: Also known as a durable medical power of attorney (POA), allows you to make important decisions about their medical care including treatment options, medication, surgery, end-of-life care, and more.
Financial POA: This document allows you manage their finances if they are unable to do it for themselves possibly due to a sudden illness or other emergency.
Taxes
Once your child starts working, they will file tax returns and should know how this works. Setup a meeting with a tax professional who can show them the basics, such as how to file a tax return, what a W-2 and W-4 are, and how tax brackets and standard deductions work.
Setup a Brokerage Account
It is never to early to start investing. Help them setup a brokerage account at one of the major brokerage firms like Charles Schwab or Fidelity. Make an initial deposit and if they have a job show them how to automatically transfer a percentage of their income into the account. If they are reluctant, meet with a financial advisor who can explain the benefits and give them an estimate of how much money they can make by starting to invest early. If their job offers a retirement package encourage them to sign up and contribute, if there is a company match it is free money.
Modify Your Plans
When your child turns 18 you must make some decisions. Do you want them to remain on our health insurance or purchase their own? If they are still living at home do you want them to pay rent or other expenses? Review your estate plan, you may need to update your wills, trusts, and the beneficiary designations on your life insurance and financial accounts.
Provide Support
Just because they are 18 and you have provided them with financial training and guidance does not mean they know exactly what to do, they will make mistakes and have questions. Let them know that you are still there to guide and support them and answer their questions.
The Tech Minimalist 