Everyone wants their children to succeed. Here are tips to help your children financially.
If you have kids or are considering becoming a parent, you have likely started thinking about what you can do to prepare them for the future, not to mention how they will impact your finances. Here are a few things you can do to help your children financially and set them up for a successful financial future.
- Set up a college savings account
- Purchase the proper amount of life insurance
- Help them open and manage a bank account
- Appoint a Guardian(s) in your Will
- Talk to your children about finances and involve them in financial decisions
- Add your child as an authorized user on one of your credit cards
- Prioritize your retirement
Set up a College Savings Account
Setting up college savings accounts for your children is one of the best ways to help your children financially so they can get a head start on their financial futures. It’s no secret how expensive college has become over the last few decades, with tuition increasing 10-fold for some institutions. Yet, college is still one of the best ways to improve one’s earning potential. An analysis of Labor Department statistics by the Economic Policy Institute found that in 2019, Americans with four-year college degrees made almost twice the average weekly salary compared to those without a degree.
However, while attending college is important and it’s admirable to want your children to graduate debt-free, you don’t need to save for the entire college expense to help your children financially. Also, college should not be your only priority. For example, saving for a house and retirement are two other expenses to consider funding for at the same time.
To begin, set a funding goal for college costs based on your means. A 529 college savings plan is an excellent place to start saving since using the plan has considerable tax benefits. A good way to increase college savings plan contributions is to request that birthday and graduation gifts for your child be deposited directly into the 529 account you set up. The earlier you start, the less you have to save!
Learn the ABCs of 529 Plans.
Purchase the Right Amount of Life Insurance
Life insurance is one of the most important types of insurance you should have, especially if you are still working. Your or your spouse’s sudden death is emotionally devastating enough but will also be financially challenging and can sidetrack your financial goals for your children. Many full-time jobs offer a form of life insurance called group life insurance that covers 1-2 times your annual salary. This may or may not be enough money to cover essential expenses, prompting the need for additional insurance. One way to determine if you have enough insurance is to assess if you have enough money and assets to cover the cost of the goals you have for your family. For example, you may want to ensure enough money to pay off your existing mortgage if you die suddenly, so your family does not have to worry about this expense. Consider your family’s other necessary expenses, as well, including if you want the proceeds of your insurance policy to assist with college or trade school expenses. Taking stock of your entire insurance portfolio will help your children financially.
Help Children Open and Manage a Bank Account
Helping your child open a bank account sooner rather than later can help them learn to manage their expenses. The process of depositing income, balancing a checkbook, and withdrawing funds to pay for expenses teaches them to be vigilant with their money. It can help them avoid overdrafts in the future. They should make financial mistakes while they are young and under your watchful eye, rather than when they are living on their own and responsible for rent, food, and everything else that goes into being an independent adult.
If your teenage or college-age child works part-time, one of the best things you can do is encourage them to start saving money. Teach Your Children Well discusses what type of an account your child should invest in.
Appoint Guardians in Your Will
First off, if you don’t have a Will and its accompanying documents, you should definitely prepare one. A Will is important because it tells your family how you want your assets distributed when you die. An essential part of a Will, if you have minor children or children with special needs (regardless of age), is to appoint a Guardian. The Guardian will be the person appointed to take care of your children after you pass away until they reach the age of majority (18 or 21 depending upon the state they live in). The Guardian will be responsible for caring for your children; in essence, they will act as your child’s parent. If you do not appoint a Guardian, the court will appoint one for you, who may or may not be to your liking. If the court cannot appoint someone, it could even result in your children entering the foster care system.
Talk to Your Children About Finances and Involve Them in Decisions
Involving your children in your finances is one of the best ways to help them build financial literacy. Take your children to the bank when you open accounts or apply for loans and expose them to the language of finance. If you can’t afford a specific gift or something they want, explain that the item is too expensive for your budget. You can build on this experience by telling them what your budget is and letting them figure out what they can buy instead or using their creativity to find another way to make the purchase. By involving your children in your financial decisions, you help them develop skills in budgeting while also teaching them some basic financial literacy.
Add Your Child as an Authorized User on One of Your Credit Cards
One of the best things my parents did for me growing up was adding me as an authorized user on one of their credit cards. Because of their actions, I had a credit history that went back a couple of years and a decent credit score by the time I turned 18. When I was applying for student loans, credit cards, and auto loans, I could qualify independently, and I usually got preferential rates on many of my loans, saving me thousands of dollars in interest. That is why this suggestion makes it on my list. You can even go a step further and get them a preloaded cash card before they can get one on their own, which can have the effect of building credit and teaching them how to budget.
Prioritize Your Retirement
One of the most important things you can do to help your children financially is prioritizing your retirement. It may seem a bit illogical at first but think about how expensive your retirement will be. In many households, it is expected that children will take care of their parents after they retire. Sure, you want your kids around after you retire, but relying on them for most of your needs will surely affect your relationship with them. It could affect their financial independence, either through career changes/sacrifices or because of the cost of taking care of you. The mantra, “my children are my retirement plan,” will inevitably prevent them from building their wealth and focusing on their financial futures. Review your budget, considering all your income, tax liabilities, living expenses, and medical expenses. Decide what you want to save for, balancing contributions to a retirement plan with your other goals, and then set aside additional monies to help achieve those goals (such as college, home purchase, vacation, etc.).
These seven actionable recommendations will help your children financially and make a significant difference in their lives and financial futures. If you need assistance with any of these recommendations, contact an Access Wealth advisor who can incorporate these goals into your financial plan.