I want to preface this section by saying that I do not have any kids of my own and have not tried these techniques out. They are merely good advice that I have read in books over the years.
Ways to Give Your Kids a Financial Head Start in Life
In my opinion, the best way to give your kids a financial head start in life is merely to get them exposed to the general idea of finance at an early age, instead of having it be a taboo topic at home. Therefore, any effort is by nature good, but listed below are a few specific methods that I thought would be useful to share.
1. Buy your child 1 share of a stock they would be interested in. The key here is that the stock has to be something they will be interested in following. For example, if your child really enjoys Disney/Pixar movies, buy them a share of Disney stock (DIS ticker symbol). If he or she likes board games, Barbie dolls, Fischer, or Hot Wheels, buy them a share of Mattel (MAT ticker symbol). Use that share of stock to teach them all that you can about the stock market and investing!
2. Give your child (if they are old enough) a task to do to help with doing your taxes – Be sure that the only thing they know about tax time is that YOU DON’T LIKE TO DO THEM AND THAT THE IRS IS TRYING TO TAKE YOUR MONEY. This promotes negative associations for your child around money and something as certain as doing taxes.
3. Keep finance/money an open topic around the house. So many times, the only things that children hear fro you about money is the negative things such as not being able to afford soething, etc. Keep the lines of communication open.
4. Open up college savings fund. Everyone hopes that their child will get a full scholarship to go to college, but the odds are not enough in your favor to take that chance. By opening a college savings fund through an institution like Vanguard, you can tax advantage of tax deferred growth within the account, while still having the luxury to direct the investments the way you want. Remember, you will want to match the maturity of the investment instrument with the time horizon associated with whenever you child will be going to college in order to maximize returns. The link below takes you to the section of the Vanguard site where you can obtain information about 529 education savings accounts. Open one!
Important Tip To Remember:
When calculating a student’s need for financial aid for higher education, it benefits the student to have as little money to his/her name as possible.
In this case, it means that it is best to place the college savings fund account in you, the parents, name instead of your child’s. This is due to the fact that parent’s are assumed to use 5-6% of their assets to pay for a child’s college education, while the student is expected to use 35% of their assets.
5. Open a Roth IRA for them whenever they first obtain earned income – See my previous posts on reasons to start investing at an early age to see the logic behind this technique. There is no minimum age limit (see article at link below) to when you can open a Tradition IRA, as long as your child has earned income. If you own your own business, even better! You can give your child earnings for jobs he or she performs for your business.
Useful tip from David Bach’s Smart Couples Finish Rich book:
Tell your child that if he or she opens up a Roth IRA and contributes to it, you will match them Dollar for Dollar. This will provide an even greater incentive for them to invest.
6. Show your child the power of compound interest, using the table below. Be sure to point out how little money it takes to accumulate $1MM if you start at an early age.
7. Give your child the gift of want – Encourage your child that if he or she wants to buy something, it is necessary for them to earn the money themselves. This can be done either buy starting your own business venture or getting a job.
This topic is discussed in more detail on a recent post at the following link – My Money Blog – Is it Good to Give Your Child An Allowance?
Keep the ideas coming and good luck!