SmartPlan Blog

Financial Communicator

6 Steps to setting your child up for financial success.

Author: Jennifer Foster, Investment Strategy Coach

SmartPlan Investing
June 9, 2022

Growing up I did not learn how to successfully handle money. I'm not blaming my parents. They did their best, but I've learned a few hard lessons along the way and want to share these with you. Believe it or not, our kids really do learn a lot from what we as parents do and do not do. I learned my money behaviors from my parents, and my daughter learned hers from me. We hope we are breaking that cycle.

If you did not learn how to successfully handle money, you may learn a few helpful tips for yourself while training your child in a more successful way to deal with money. Today, we will talk about how to teach our children successful money habits such as: earning money, giving back, saving and investing, debt and credit, and most people's favorite... spending.

My very first of the six steps to setting your child up for financial success is to...EARN. Do you give your child an allowance or money for doing chores? I know this can be a hot topic and debate for many. Here is my personal take on the subject. I personally would not give a child an allowance to pick up after themselves. I believe kids should learn how to take care of their personal things and their space, such as their bedroom. That's just part of life. They won't always be monetarily rewarded for doing what they should do. However, I do believe in kids learning to earn and manage money from an early age. The first step to learning how to successfully manage money is to earn it. So yes, give them opportunities to earn money by doing additional chores, or help them come up with a business idea to make money. I just found out my niece is selling soap… What a neat idea! Explore what your child loves to do and what they are good at, and begin brainstorming business ideas. If you own a business, you may be able to have them work for you.

Next, teach your kids to GIVE. Many kids are given an allowance for doing chores, so that they can spend it. Let's not skip step two for setting your child up for financial success, this is a very important step. There are many ways to give. If you belong to a church or religious organization this is a great place to start or find a cause they can get behind like helping kids less fortunate than them. A good rule of thumb is to GIVE 10%.

SAVING is our next step. Saving is a critical step. Help your child think of things they can save for. Here are a few suggestions: Christmas gifts, vacation money, college, home, and car. I especially love the idea of kids saving for college. Did you know that kids who have college savings are more likely to go to college? If they have a hand in paying for it, I'm guessing those odds are even greater as it's their money. Ever heard of the kid that went to college and partied their first year just to drop out? Yeah, we probably are thinking of someone we know who did that. My daughter is currently paying for herself to go to Cosmetology school and I see such a difference in her commitment to finishing and doing her best. She has a new sense of pride for saving up and paying for school all on her own this time. As I said I've learned a few things along the way and this is why I'm sharing these steps with you. Giving your child the gift of responsibility and ownership by paying for college is an amazing gift in my eyes. When saving I prefer they save 20% of what they earn, but you can use your own judgment here. Older kids should learn about an emergency fund while younger kids may have no need for one quite yet.

Next on our six steps for setting your child up for financial success is to INVEST. Yes, I said it- INVEST! Teaching our kids delayed gratification is so important. Kids who invest early and often can learn the power of compounding interest ie: when your money earns money. Watching their money grow can be both really exciting and educational! Not to mention, teaching our kids to invest can be really educational for ourselves. We can't teach what we do not know, and there is no better way to learn a subject than to teach it. Do you feel like you could know more about investing and the pitfalls to avoid? Reach out to me and I will let you know more about our Investor Master Class series. I suggest investing 20%, this means they Give, Save, and Invest, 50% of what they earn and live off of the other 50%.

It seems each of these six steps is so important. Which is the most important one? They are all equally important and each has amazing positive impacts, but this step can have long-lasting destructive consequences. Next, we will talk about DEBT and CREDIT. People often think of these as the same thing, but let me break this down. According to Merriam-Webster debit is "1. something owed. 2. a state of being under obligation to pay or repay someone or something in return for something received: a state of owing whereas; Credit shows a history of borrowed and repaid money.",a%20criminal's%20debt%20to%20society

Good credit or a high credit score is very important in moving through life. A credit score's consequences affect such purchasing of goods and services as a home, utilities for your new home or apartment, a car, and car insurance, and even a cell phone. These companies will pull your credit to see if you are reliable or a risk. If you have a good credit history you often are charged less for such services or avoid additional costs.

We certainly want to talk to our kids about the dangers of out-of-control debt. I've seen parents give their kids credit or debit cards, but I would steer clear of this practice. You may want to keep the child's money in an actual bank account if it's a large amount because of the possibility of theft or fire. If this is the case you may want to get a debit card; however, I would go to the bank with your child and withdraw the money. If they are old enough, I would have them write the amount withdrawn in the checkbook register and subtract it from the balance. This way they get to see that money coming out lowers the balance and deposits increase the balance. Let your child actually have cash in their hands, so they can see it and feel it. There are studies that have concluded we spend less when we are using cash and much more when using credit cards.

Let's dive into credit a bit more. I'm going to share a golden nugget that can really set your child up for future financial success. Did you know you can add your child as a signer on your major credit card and lend them your credit? Here are a few points to consider.

  • You don't have to give them the card or even let them know they are on the account.
  • Make sure you are responsible with credit if you are going to do this.

Lending your child your credit can set them up for real financial success without them ever needing to use a credit card. By the time they are 18 or graduate college they can be one step closer to being set for financial independence. Setting our kids up to be savvy and independent is essential.

Now for the part, most of us seem to love the most! Now that they have earned the money, given back, saved, and invested, it is time to go shopping. The last 50% of what they earn is theirs to SPEND. Yay!!! They worked hard to reach this step, so it is time to celebrate. Kids who are taught to live off/spend 50% of what they earn can go on to be super successful adults. They'll have you to thank!,of%20it%20in%20your%20wallet.

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