You don’t have to create a trust fund to ensure your child’s financial well-being later in life. In fact, if you’re a parent trying to create a financial plan for your children, you shouldn’t focus solely on how to give them money. You should also be laying a foundation for them to learn how to manage money on their own.
One of the most important things parents can do to help their kids achieve financial success is talk to them about money. The T. Rowe Price 2016 Parents, Kids & Money Survey found that parents who discuss financial topics with their kids at least once a week are more likely to have kids who report being smart about money than parents who don’t have financial discussions with their children.
Talking about money is only the first step in helping kids develop fiscal responsibility. Here are nine steps parents can take now to help their kids have a better financial future.
1. Give Your Child an Allowance
One of the best ways to lay a strong financial foundation for your kids is to give them an opportunity to manage money on their own from a young age. Paying kids an allowance is a great way to teach them about the value of working for what they want.
“New toys, going out with friends, even a car — having to work for, save for and spend their own money will help them be much more aware of the value of a dollar and much less likely to spend frivolously when they are eventually on their own,” said Bill Engel, a certified financial planner at Fort Pitt Capital Group in Pittsburgh, Pa.
Giving kids an allowance — and the opportunity to make spending decisions — helps them learn budgeting, which is the foundation of responsible behavior, said Claudia Tabacinic, head of deposits and payments at TIAA Direct.
Moreover, it’s okay to let kids make bad choices about spending — doing so allows them to learn from their mistakes.
2. Encourage Kids to Save
According to the T. Rowe Price survey, 51 percent of kids spend their allowances as soon as they get them. However, there’s value in learning delayed gratification, Engel said. He went on to suggest that parents teach their kids how to save for a goal.
Parents can require children to save a certain percentage of their allowances or any monetary gifts they receive. Several banks — including Capital One, U.S. Bank and Wells Fargo — offer savings accounts for kids. Although most banking is now done online, Engel recommends taking a child to a bank branch to set up a savings account and make an actual deposit with cash.
Parents can also encourage saving by giving their kids incentives. Tabacinic said she gives her children the option to spend or save gifts of money they receive but offers to match any amount they save.
“It encourages the idea that spending isn’t always the right thing to do,” she said.
Going this route also introduces the concept of matching contributions — which many employers offer for retirement savings — and taking advantage of “free” money.
3. Open a Brokerage Account for Your Child
Less than half the parents surveyed by T. Rowe Price reported teaching their children about the value of long-term investing. Moreover, just 14 percent said their kids had investment accounts. It’s important to teach children about the stock market and encourage them to invest at a young age, so the concept won’t be foreign to them when they need to choose investments for retirement accounts later in life.
“The earlier you can familiarize [children] with it, the less intimidating it will be,” Engel said.
You can open a custodial brokerage account, which gives you control until the child reaches age 18 or 21 (depending on the state). Although investing in a mutual fund is ideal because it offers diversification, you might want to start with individual stocks because they are easier for kids to grasp, Engel said. Have your children pick companies they like — such as Apple, Disney or McDonald’s — and then walk them through the process of buying shares and watching them perform.
Be aware that assets held in a child’s name can affect financial aid eligibility and even trigger a tax bill, if earnings exceed a certain amount. However, if you let your child buy stocks through a brokerage account, you’ll have to gift them the money, an action which could trigger the gift tax, Engel said.
4. Make Your Child Get a Job
Part-time work can teach teens values that will help put them on solid financial footing as adults.
“It teaches them responsibility, time management and discipline, and helps them realize the value of money in exchange for work,” Engel said.
Engel’s daughter, who got her first job at 16, gained a new appreciation for the work required to purchase the things she wanted. For example, after seeing how much was left in her paycheck after taxes, she realized that it took about an hour’s work to buy the pricey coffee drink she enjoys.
If teens find jobs they’re passionate about — such as pet sitting because they love animals — they might also learn skills that will lead to a career later in life, Tabacinic said.
5. Help Your Child Open a Checking Account
Only 24 percent of the parents surveyed by T. Rowe Price said their children had checking accounts. However, it’s important to give kids experience managing checking accounts while they’re still at home, when you can offer guidance.
Engel said he didn’t have a checking account until he went to college. As a result, he headed off to school without experience writing checks, using an ATM or making sure there was enough money in his account. His daughter, on the other hand, has a checking account and is using her bank’s mobile app to keep tabs on it. She’s gaining hands-on experience by managing her own money.
6. Open a Roth IRA
Another great way to set your children up for future financial success is to open a Roth IRA for them at a bank or investment firm. As long as they have earned income from a job — such as babysitting, mowing lawns or working in retail — they can start saving for retirement in a Roth. It’s important to note that contributions can’t exceed a child’s earnings, and the maximum yearly contribution is $5,500.
Kimberly Foss, author of “Wealthy by Design” and founder and president of Empyrion Wealth Management, opened a Roth IRA for her son when he was just 5. At the time, he was earning money doing simple tasks in her office, such as shredding paper. He’s now 11 and has about $60,000 in the account.
Foss said opening a Roth IRA can help your child establish good saving habits and also give him or her a substantial nest egg as a result of compounding interest. Along with offering tax-free retirement withdrawals, a Roth can be tapped for college costs or a down payment on a house.
Related: 5 Reasons You Need a Roth IRA
7. Teach Kids Responsible Credit Card Use
Giving your children credit cards can be tricky. It’s important that they start building good credit, which will help them when they’re adults and need to borrow money to buy a car or house. However, you don’t want to introduce credit before they’re able to handle it responsibly — especially because you’ll have to cosign on a card or make children authorized users of your card, if they’re younger than 21.
So, it’s important to start slow when it comes to giving credit to kids, Engel said. You can accomplish this goal by taking out a secured credit card, which has a credit limit based on the amount that’s deposited with the card issuer.
Additionally, parents should explain to their kids that credit cards should be thought of as cash, and users should only charge what they can afford to pay off each month, Tabacinic said. Show them how to review their monthly statements to see how they’re spending their money — and how much interest is being charged if the balance isn’t paid. You should also explain the cost of making late payments.
8. Take Advantage of a 529 Plan
More than two-thirds of college students graduate with student loan debt, according to The Institute for College Access & Success. Parents who want to ease some of the burden for their kids can open college savings accounts when their children are young, so they won’t have to rely so heavily on debt.
Engel recommends that parents save college funds in a 529 plan, which is similar to a retirement account in that money can be invested in mutual funds. However, with a 529, tax-free withdrawals are allowed for qualified educational expenses. Some states even offer tax deductions or credits for contributing to a 529 plan.
However, parents shouldn’t let saving for their retirement take a backseat to financing their children’s college educations, Engel said. After all, there are no loans for retirement.
9. Have Your Kid Contribute to College Costs
According to the T. Rowe Price survey, more than 60 percent of kids expect their parents to pay for college. Even if you can afford to pay for your child’s college education, or fully fund a 529 plan, that doesn’t mean you should, Engel said.
For starters, you shouldn’t save enough in a 529 to cover the full cost of college. After all, you might not need that money if your child gets a scholarship or opts not to attend school. Earnings on non-qualified withdrawals are taxed as ordinary income and hit with a 10 percent withdrawal penalty. Further, kids should take on some of the responsibility of paying for college themselves.
“There’s a lot of value in letting kids have some skin in the game,” Engel said. If children are covering some of their educational costs, they will take college more seriously. “None of us appreciate what we’re given as much as what we’ve earned,” Engel said.