Teach kids how to manage 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?
An interesting way to do so, if you have a teen and own a business, might be 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 these earnings and then contribute to a Roth IRA. Under current tax law, they may contribute up to $6,000 a year. 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 is needed to the funds, the contributions can always be pulled out 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 are also important to learn. Have you ever purchased something at a store? The cashier rings up the sale and tells you the price is $5.23. You hand them a 10-dollar bill, which they punch into the register. As they are ready to give you change, you ask can I give you a quarter. The cashier is totally confused.
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.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.