The information in this column is not intended as legal advice but to provide a general understanding of the law. Any readers with a legal problem, including those whose questions are addressed here, should consult an attorney for advice on their particular circumstances.
Many of my clients focus on how to preserve their estate so that they can leave their children or grandchildren something. There are many ways we can help guide our clients to make this goal happen. However, what if you could teach your child how to save money and build wealth on their own? Then, if you are able to leave them something as well, they will be even better off and perhaps have learned how to build wealth on their own. Depending on your child’s age, there are a number of options. While I encourage you to seek the advice of a trusted financial planner licensed in this area, in this week’s column, I am going to provide some options for when they are teenagers or young adults.
Encourage a summer job
We know from our research that young people who have jobs are more likely to be better savers in the long run. When my son Jake turned 12, we sat down and discussed how he could earn money. This resulted in a snow cone stand. It is important to make sure your child is saving a portion of every paycheck—and maybe even require them to help out with expenses, as well. We did this by having Jake take from his weekly income the cost of supplies for running the stand. It is also perfectly reasonable to expect kids to pay for gasoline in a car they drive or for trips to the movies with friends. As they get older, they can pay for their insurance coverage and expenses.
As teenagers become more independent and start driving themselves around, some parents start enrolling their child as an authorized user on one of their credit cards. From a practical perspective, having a credit card to deal with emergencies like flat tires is always a smart idea. More to the point, your teen can learn to spend within their means, assuming you require them to pay back every dollar they charge.
This is also a good opportunity to discuss the importance of being responsible with credit. When you take responsibility for paying back borrowed money, lenders can trust you more when you need to make a big purchase in the future.
It’s equally important to explain the basics, such as how credit cards differ from debit cards. And it’s essential to warn kids about the dangers of high-interest debt and revolving credit. The more they know about debt, the more likely they are to manage it responsibly.
Another amazing investment tool is to consider a Roth IRA. Once your kids have earned income, they can start contributing to an individual retirement account (IRA). Roth IRAs are funded with after-tax dollars, but withdrawals in retirement can be entirely tax-free. By funding these accounts early—when their income, and thus their tax rate, is still very low—kids could benefit from decades of potential compound growth and tax-free income in retirement.
When your children are young adults, it is a good idea to help them set a budget. Care must be given with this, because you do not want to make them think you are over-controlling or a helicopter parent. Once your kids accept their first jobs after college, help them draw up a spending plan based on their salaries and estimated expenses. When you’ve never lived on your own, it’s easy to underestimate common expenses, such as groceries and utilities. This is also a great time to learn the difference between fixed expenses (things you have to pay for each month) and discretionary expenses (things that are fun but are not necessary). There is always a new video game or a new pair of shoes to buy, but if spending on those things is going to make it impossible to pay rent or buy gas, they might find themselves short at the end of the month.
It’s also a good idea to review their employer benefits with them to ensure they’re taking full advantage of all available options, especially any matching contributions to employer-sponsored retirement accounts, such as 401(k)s. It’s especially important for them to understand the value of those matching contributions.
Encourage your children to stay invested. Help your children understand that time is their greatest ally when it comes to investing. The old saying “Time in the market is better than timing the market” can’t be said enough to your children.
As for the investments themselves, there are literally thousands of low-cost index funds to choose from, which can be overwhelming to a novice. When in doubt, choosing a product that allocates and invests its money for them might be the best approach.
One such option is a target-date fund, whose asset allocation mix becomes more conservative as the target date approaches. Another option would be to consider a robo-advisor that builds, monitors, and rebalances a diversified portfolio of exchange-traded funds on an investor’s behalf.
Life is a series of opportunities. Take the opportunity to lead your children by example when it comes to saving. You should seek the advice of your financial planner so that they can explain your options.
Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas. © www.moakandmoak.com
