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September 27, 2012 No Comments

Raising Financially Responsible Children

Ask any wealthy parent what their biggest fear is and they would probably tell you that raising financially irresponsible children is at the top of the list.  Parents have an innate fear that their children will ignore every single word they have ever told them, not appreciate hard work, and grow up to be dependent slackers who wait for their parents to die.

Much of your child’s appreciation for hard work will come from aspects of their lives outside of the world of finance.  Successes in sports or education are often effective ways for children to learn how hard work can pay off, and their personality will often be a bigger factor in their maturity than which words you choose when speaking with them.  With that said, there are numerous things you can do throughout your child’s life to educate them on personal finance and better prepare them for supporting themselves when the time comes.

First, you must think about what message(s) you want to convey to your child about money.  Depending on the values of your family and your financial circumstance, the message may differ between families and there is not one correct message to convey.  Whether you want to stress the value of money or emphasize philanthropic giving, you should create a consistent message and ongoing dialogue with your children so they understand your message is important to you.  Eventually, they will associate your money lessons with your success and when the time comes, they will be more likely to implement them.

The most common message that parents wish to convey is that nothing is free and everything costs money.  This is one of the hardest lessons for your children to learn from their parents because often the only way to truly appreciate the value of money is to fully support yourself.  However, simple exercises throughout your child’s life can educate them on this and prepare them for living a financially responsible life.

The simplest method for teaching them this lesson is to tell them “No,” when they ask for something.  No one gets everything they want in life, and learning this lesson is imperative to raising financially responsible children.  In addition, telling them that you do not have the money for it is an acceptable and appropriate answer.  While it may mean more eventful rides home, the lifelong lesson they will take from this outweighs the short- term issues.

A more positive method for educating them on the value of money is to have chores with assigned payouts such as cleaning their room for $2.00 or taking out the trash for $.50.  This method can be extremely successful in showing them that you work, you get paid, you get to buy things; which is how the real world works.  As they approach leaving the house, you can even introduce taxes, rents, and other sexy expenses that await them in real life.

One common way to educate your children on financial management is to have them sit down each month to pay the bills with you.  Show them how much you pay, how the choices they make affect the amount due, and have them think of any ways to save money.  Share with them the total amount you pay each month on boring things like utilities, your mortgage, and taxes so they can see that most of what they will earn will not go to wants but needs.  By including them in this process, you demonstrate that this activity is an important part of being financially responsible.

Regardless of the lessons you want to teach your children, there are age appropriate methods to educating your children on the principles of personal financial management.  The point is to have an ongoing dialogue with them to teach them the harsh reality that awaits them.  Shielding your children from the realities of financial management does nothing to teach them what is necessary when they are called upon to support themselves.

In the event that your children have access to unearned wealth of their own, it would be recommended that you not let them spend those funds on anything in lieu of earning the money on their own.  Children who never have to earn the money before they spend it run a much higher risk of not appreciating the value of hard work and becoming financially dependent on handouts from family.  Whether or not you inform them of this wealth is at your discretion, but careful consideration should be given prior to doing so.

Most parents struggle with the question of when to inform their children of the family’s wealth.  There is not a correct answer to this question, but you should ask yourself why would they ever need to know this?  As you age, the answer will be so they can act as an executor to your estate when you pass, but telling a high school junior that their family is worth $10 million and they personally have $750,000 in the bank serves no practical purpose.  In the event that a circumstance arises where they need to know, then you can tell them, but the best time to tell them is after they have become financially independent and have demonstrated they are financially responsible.

By engaging your children using activities and having an ongoing dialogue with them about financial management, you can equip them with the skills necessary to be financially responsible.  If you can find the methods most appropriate for your family and are committed to educating your children on the basic principles of financial management, then you can raise financially responsible children.


Saving For Your Child’s Education

Paying for college can be one of the largest expenses in your financial life.  It can also be one the best investments you will ever make for your family.  Estimates for the cost of college can vary widely depending on the age of your child, whether they would attend a public or private college, and what level of degree they plan on attaining.

The first step in determining how to save for college is to determine how much of the expense burden do you want to cover for your child.  Some parents believe that their child should share in the expenses for their college education as a way to motivate them.  Other parents believe that graduating from college debt free is the best gift they could give to their child.  Some parents cover the cost of an undergraduate degree and expect the student to cover any additional degrees.  One approach is not better than the others but instead is a parental choice that you must make prior to saving for college.

By 2030, the average four year cost of college is estimated to be $135,000 for a public institution and $285,000 for a private school.  In order to fully fund college at these levels, you would need to save about $300 / mo for public and approximately $600 / mo for private for the next 19 years generating a return of around 7% each year.  Depending on your cash flow, you may not be able to afford this monthly outlay but the key is to begin to save whatever amount is currently feasible.

Once you have established the parameters of savings for your child’s education, you have several account options available to you that provide tax benefits.  The most common account used to save for college is the 529 College Savings Plan.  Contributions into 529 plans offer a current year state tax deduction (subject to limits,) earnings grow tax deferred, and withdrawals for college expenses are made tax free.  In order to receive the state tax deduction, you must open a 529 account with your state of residence.  In the event you were to move out of state, you can open a 529 account with your new state and roll your existing funds into the new account, in most cases.

Since 529 plans differ from state to state, their investment options do as well.  Some states have limited investment options only offering aged-based portfolios where the investments are designed to become less risky as the child nears college, while other states have an expanded list of quality mutual funds to choose from.  Consult with your advisor to determine which investment approach is best for you.

Tax free withdrawals can be made from 529 plans to cover an expanded list of eligible expenses.  In addition to tuition and books, eligible expenses include computers, internet access, and even off campus housing.  To the last point, most schools are migrating towards using a fixed dollar amount that may be withdrawn tax free based on the cost of living in their location.

Aside from strictly saving for college, 529 plans can play an important role in managing your long term wealth.  They offer extensive estate planning flexibility and benefits that you should discuss with your advisor.  Strategies to reduce or even eliminate your state tax liability can be achieved with the help of your accountant.  It is important to understand the limits on contributions and deductibility before enrolling in a 529 plan.  While you have the ability to bring any excess 529 funds back into your estate, there are tax penalties associated with doing so.

For additional information on saving for your child’s education, please contact Scenic Wealth Management.