Graduation season always brings to my mind one important subject schools don’t usually cover: financial education. We parents have to take it upon ourselves to teach this important “class” at home. And the younger your kids are when you start these lessons, the more likely they are to take seed and create lasting, positive financial habits.
On today’s show, we talk about how to introduce your young children to saving and investing, some important planning tips for young adults just entering the workforce, and how to involve your grown children in your estate planning.
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Key Insights on Talking to Your Children about Money
Before age 18.
Many parents still open custodial accounts for their children, but they aren’t an ideal tool if your goal is to teach your kids about long-term saving and wealth-building. Once the child turns 18, he or she gains total control over the account, and all the money in it. Your well-intentioned prep for a retirement that won’t come for 50 years might have a tough time battling the temptation of a new iPhone.
Instead, we recommend that our clients open savings or investment accounts in their own names and earmark them for their children. At the end of every month, go over the account statements with your kids. Explain to them how interest is compounding. Seeing these accounts grow little by little can help even younger children get excited about saving. In fact, we recently had a client’s 11-year-old son come into the office with $50 of saved allowance money that he wanted to contribute to his investment account!
For teens who are starting part-time jobs, here’s an idea that worked really well with my own kids: I set up Roth IRAs for each of them and matched whatever they earned with contributions into those investment accounts. As they’ve graduated from college, my kids have seen those match contributions grow into nice starter nest eggs, and they’re motivated to keep contributing.
Paying off student loans is one of the top concerns among recent college graduates, and in a way, that’s a good thing. It shows that millennials are planning for their futures and not just snapping up cars and big screen TVs with their new paychecks.
However, there’s more to long-term financial planning than just paying off debts. If your adult kids are making above-minimum payments on their student loans rather than contributing to an employer-match 401(k) or saving, they need to do some better number-crunching. What’s the interest rate on those student loans, and how do they compare with the compounding interest they’re missing out on from retirement account contributions? What percentage of annual income is your child saving? We’d love to see in the 10-15% range. Another common piece of advice is “Live like a college student for the first six months after you graduate,” meaning keep your expenses down where they’ve been for the last four years, and don’t jump into a big home or auto purchase before you’ve built up a safety net and, hopefully, some investable assets.
Finding this balance between paying down debt, saving, and investing can be difficult for young adults. This might be the first time in their lives your children have had to set a serious budget and think more than a few years into the future. We’re always happy to sit down with the children of our Keen Wealth clients, run some numbers, and give some preliminary guidance.
But at the other end of the spectrum, if you find yourself supporting your adult children well past college, please revisit this blog I wrote about cutting the cord before your retirement assets are put at risk.
Adult children as you near retirement.
The final phase of your children’s financial education will occur as you near retirement age. At this point, your adult kids probably have their own homes, families, career paths, and retirement plans in place. You may even get to see them pass down your own good financial example to your grandchildren.
But now you’ll need to bring your adult children up to speed on your legacy planning. This discussion doesn’t have to be about dollar amounts and possessions – although the clearer you are about your wishes when you’re still around to articulate them, the easier settling your estate will be when you’re gone.
The important thing is to make sure you’ve chosen the right beneficiaries and executors, and that those key family members know where to find all of your important documents: copies of your will or trust, identification, banking info, and any other important accounts and passwords they’ll need.
One step you can take to simplify this process is bring your grown children in to Keen Wealth and introduce them to your fiduciary advisor. When it is time to execute your estate, your beneficiaries will have a host of decisions to make that can drastically affect their tax pictures and the longevity of your legacy. Don’t just talk to your kids about the need to plan for your estate – show them whom to call, and whom they can trust.
Bill Keen on Talking to Your Children about Money ...
“The younger your children are when you start financial lessons, the more likely they are to take seed and create lasting, positive financial habits"
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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