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Are you raising financially aware kids?

“I wish I knew that when I was younger,” is a phrase we hear often and something I personally exclaim from time to time. Finances may not be your exact dinnertime “topic of choice” but too often we neglect to educate our children on the importance of building a strong financial foundation.

Talking to children about money and finances is not an easy conversation, especially because it needs to be ongoing as opposed to a one-time event. But helping kids understand the following financial topics at an early age can help set them up for decades of success.

The Value of Hard Work and Money

As an adult, I truly value how my parents instilled the importance of earning something instead of it just being given. If I wanted a video game, a car, or “the” new shoes, it was up to me to work for it. I can recall having part-time jobs, doing extra chores around the house and carrying golf bags during the summer to earn money. Was it fun? No! But by doing the work and understanding how my time and energy allowed me to get the things I wanted, it truly taught me the relationship between hard work and money.

The Importance of an Emergency Savings

Why is it that we can always expect the unexpected? Having an emergency fund helps us stay afloat through unexpected events such as fixing a flat tire, replacing a computer, or attending to a home repair. Having a designated savings account can help cover these expenses and reduces reliance on credit (which can perpetuate tough financial situations). Encourage your kids to set aside a portion of their pay/income in a separate savings account. One of our WELLth team members has her son set aside 50% of whatever cash he earns or is gifted. You can imagine his delight seeing his savings build over time. Whatever the strategy is, try to build the habit of savings and celebrate milestones to make it fun!

The Power of Investing

Putting your money to work for you is one of the best ways toward financial independence, and the sooner you start the better. There are a number of investment solutions out there but here are the accounts all young adults should be considering:

  • Roth IRA – a person has to be at least 18 to open a Roth IRA themselves, but a parent can open a custodial Roth IRA for their child which allows them to contribute into a Roth account up to either the greater of $6,000 (2022 limit) or their earned income. A Roth IRA grows tax free and allows for tax free distributions in the future, so getting as much into a Roth IRA as early as possible can benefit in the long-term.
  • Employer Sponsored Plan (401k / 403b) – for those younger adults entering the workforce, many employers offer to their employees a way to save for their retirement through a company sponsored 401(k)/403(b). These plans allow additional savings, but many companies provide a employee match where the company will make contributions on behalf of their employees. It’s important to know what plan is available to you as well as the match provided so you don’t leave any free money on the table.
  • Individual Account - Another account to consider is an individual account which is a great way to put extra funds to work above your savings. An individual account is funded with funds that have already been taxed but allow you to invest into various securities which can grow long term. Unlike retirement accounts such as Roth IRAs and 401(k)s, an individual account allows a person to access those funds at any time without any penalties, so this can help build wealth long-term and can even be used to help with a down payment on a home, new car or even a bigger vacation.

I like to challenge young investors to embrace risk. Children and young adults tend to have longer time horizons when it comes to investing, so being allocated into equities (which tend to be risker than bonds) should be the priority. Being too conservative at a young age can have a negative impact on your long-term financial independence.

The Significance of Credit

People tend to think of credit and debt as inherently bad, which they can be if used improperly. But building good credit at a young age can help save thousands of dollars over time. Most individuals are judged on their ability to borrow based on their FICO credit score which ranges anywhere from 580-800. The higher your FICO score the more likely you are to receive favorable credit terms such as a lower interest rate and higher borrowing power. Lower FICO scores tends to lead to higher interest rates and less borrowing power.

We recommend clients help their children establish credit at a younger age. Adults can add a minor as an authorized user on their personal credit which allows the minor to “piggyback” off the credit habits of the adult. One of the factors within the FICO score is credit history; the earlier you can establish history the better. A longer history of good credit can help kids when they start applying for their own personal credit cards, car loans, mortgages, etc.

We encourage you to give these tips some thought as you strive to raise financially responsible children. Most importantly, be intentional about money conversations with kids. Finances should be more than just about how much money is in the bank but should also include the psychological and behavioral aspects in the short-term (emergency savings), intermediate-term (investing) and long-term (financial independence). Let’s try to limit how often our kids will say, ‘I wish I knew that when I was younger!” And remember, SRP WELLth is here as a resource for your entire family.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Wealth management (i.e. WELLth) services are provided separately from retirement plan consulting services you may receive from SRP as a result of participation in your employer's retirement plan. They may involve an advisory agreement and/or an additional fee.