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Every child wants to have a fun childhood, and every parent aspires to provide them with one. It is common for children to spend all their pocket money on candies, toys, and video games. They are too young to understand the value of saving money and investing. Sadly, it becomes even more challenging when their parents are no longer together. Each parent is fighting for their attention and wants to spoil them.
However, the biggest drawback of this approach is that they will never learn how to save. As adults, they can saddle themselves with massive debt and no assets. It is because no one taught them how to save and invest. Here is a step-by-step guide to raising a financially astute child.
Children are eager to learn. The money mistakes they make are not because they intend to but because they don't know any better. You don't have to be a financial guru for your kids to become money savvy. Ideally, both of the co-parents should team up to coach their kids. However, a narcissistic parent may want to spoil their children to make the other parent look bad. You can start educating children at the age of 4 or 5 when they know additions and subtractions.
The first step would be to set up a custodian savings account with a local bank or credit union. Ideally, both parents should be custodians of the savings account. One parent can also be the custodian. You will need basic information such as your child's date of birth, social security number, co-parent(s) date of birth, and social security number. To prevent one of the co-parents from withdrawing all the funds, you can set a max withdrawal limit by any co-parent. For any amounts above the withdrawal limit, both co-parents should sign. If the account has only one co-parent as a custodian, there is no need for such a limit.
Once the account setup is complete, you can contribute the pocket money. Inform the child of the account balance, and every time they want to spend any money, it should come out of the account. It will teach the child how to save and spend. It will also teach them how to use an ATM card at ATM and a cash register.
All savings accounts are interest-bearing accounts. Show the child interest earned every month. It teaches them that the more they save more interest they will get, and their money will grow.
Budgeting is another skill for children to learn. It is a skill that even a lot of adults don't have. It becomes even more important if one parent is financially better off than the other. The better-off parent may tend to spoil the child. Tell your child the maximum allowance they will get every month and set a savings goal. Work with your co-parent on it if needed. Whatever they spend is applied to the budget and deducted, and whatever they save is credited. Do not let them go over budget. If they need a new video game console, set a savings goal to purchase it.
College is probably the second most expensive investment your child will make, a house purchase being the most. Not every parent can pay for their child's college education, and it becomes even trickier if the parents are separated. However, almost every state has a tax-free college savings plan called the 529 plan. These plans grow tax-free, and your child can use the money for in-state and out-of-state college education. Work with your co-parent to see if both of you can start contributing to it.
According to Alexis and Tim Woodward, Certified Financial Planners and founders of Blend Wealth a financial advisory firm for co-parents - "Each parent can set a separate 529 plan for their children that can be funded individually. If there was a 529 plan before the separation, it can be rolled over into two separate plans where each parent can contribute separately. Some states may also match a part of your contribution."
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Alexis and Tim Woodward of Blend Wealth with their two children they are co-parenting. (image credit: Blend Wealth website)
Related: 529 College Savings Plan
Investing in the stock market is another way to teach your kids how to grow their money. Nowadays, you can open a new brokerage account for as little as $100 as the starting balance. You can open a custodian account with a brokerage and have your child contribute. There are plenty of low-cost ETFs that allow you to invest in the broader market. They trade just like stocks, except that they have shares of several companies in them. For example, SPY invests in companies from the S&P 500 stock index, which has the best companies in this country. While the stock market is subject to fluctuations, it is one of the best money growth engines. Several brokerages now allow you to buy fractional shares. You can add every month more as your child saves. Investing is a lifelong skill that a person needs to have. While it may take a saver 10-15 years to double their money, an investor can grow it ten times in the same amount of time.
As a teen or even before, your child may start earning. Setting up a Roth or a Regular IRA will give them an early start in retirement savings. If you are a small business owner with an LLC, you can also employ your child and pay them $12000 per year. This money will be tax-free for your child, and you will get a deduction as a business expense. Your child can invest part of the money in an IRA. All brokerages offer IRA plans, and you can buy a low-cost ETF just like in a regular investment account.
Understanding how credit scores work and how to use a credit report is also a lifelong skill your child needs. Start educating them about building credit responsibly and the difference between good debt (e.g. mortgage) vs. bad debt (e.g. carrying the credit card balance). You can also teach about the free credit report from AnnualCreditReport.com. They can also get credit scores for free from various apps.
While teaching your child the value of investing and saving is important, be careful about overdoing it. You still want to have your child enjoy their childhood. Do not deprive them of necessities. You want them to grow up and enjoy their life. They need to know the difference between enjoying life vs. spending beyond their means. The primary goal of this exercise should be to raise fiscally responsible children, not a child who is cutting corners on everything.
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Warning: This post is neither financial, health, legal, or personal advice nor a substitute for the advice offered by a professional. These are serious matters, and the help of a professional is recommended as it can impact your future.