When my daughter was born, I asked my mom for her financial advice. My mom has always invested for my future and taught me to manage my finances. I hope to teach my daughter the same lessons. Even though my mom has taken the lead in my financial future, my dad has taught me several life lessons about money, living within my means, and hard work. Here are ten tips I have picked up from both my parents:
1. Purchase a life insurance policy. Most parents do not want to think about a life insurance policy for their child, but there can be several benefits. A whole life insurance policy (which does not expire when your child grows up) can allow him to get insurance at low premiums. This protects your child in the event that he becomes un-insurable (for example, due to a future illness). In addition, a life insurance policy can be a financial safety net and build substantial cash value over time, which your child can borrow against in the future.
2. Invest in mutual funds. Your child has the advantage of youth, which means she can weather the ups and downs of the stock market. Mutual funds are portfolios of stocks, bonds, and cash that are pooled together for investment. These assets are managed by a professional mutual fund company. There are thousands of funds available, so it is important to do your research and consider consulting a professional financial advisor.
3. Set up a 529 account. A 529 plan is a state-run investment program that helps you save for college. The value of your investment grows tax-free until withdrawn. In the years when withdrawals are made, the growth is taxed to the student, not to you. Your child’s lower tax bracket can be financially beneficial to you. Your account can be used to pay for any accredited college and graduate school. Even after your child turns 18 or 21, you continue to have control over the account.
4. Match every dollar saved. This is a basic incentive tool for parents. As a kid, I was never tempted to withdraw money once it was in my savings account. As a result, I ended up using my fourth-grade lemonade-stand earnings to supplement my first low-paying job when I graduated from college. If you’re concerned about your child making a withdrawal once you have matched his savings, consider matching his total savings each quarter or once a year. Or, if you prefer not to match every dollar, offer your child an appealing interest rate. For example, at the end of the year make a contribution of 10-20% of his total savings.
5. Teach your child to “pay” the bills. When your child is old enough to write a check, let her practice by writing checks from the family checkbook. Of course, you have to sign the check, but your child will learn how to properly write a check and log it in a check register. Even before your child can be issued a driver’s license, you can obtain an identification card from the DMV. Starting a checking account for your child will help her learn financial responsibility. Once your child is older, even if you pay for her car payments, insurance or extra-curricular activities, you can deposit the money into her account and she can write her own checks.
6. Apply for your child’s first credit card. Allowing your child to have a credit card may sound ridiculous, but she will probably have one eventually. By co-signing for her first credit card, you can set a reasonable limit and teach your child how to spend responsibly. Instead of giving an allowance, start by agreeing to pay off a certain amount of her credit card each month (perhaps $50 or $100). You will also be able to review the monthly statement and use these transactions as teachable moments.
7. Involve your child in your work. One of the greatest assets your child will have in the future is his work ethic. You can help establish this by role modeling a positive relationship with your work. Bring your child to your place of employment, talk about your career, allow your child to explore your workplace and observe you in action. All these images, experiences, and memories will strengthen your child’s attitude towards work.
8. Invest in a retirement account for your child. Most parents think of saving for a college fund, but few think as far ahead as their child’s retirement. A Roth IRA is a good option for kids because they do not need the tax deduction. Instead of the usual tax deduction, the Roth IRA lets your money accumulate tax-free. The maximum contribution in 2008 was $5,000. Is it too early to think about your baby’s retirement? Maybe. But, consider this, $2,000 invested today and left to compound for say 65 years at a 10% return, will grow to $143,000 tax-free, and $2,000 invested every year for three years and left untouched for 62 years, will grow to $521,830 absolutely tax-free.
9. Invest in your child’s first home. This can sound daunting, but there are several advantages to helping your child with her first home. I know I was extremely fortunate that my parents were able to do this for me. One way to help your child purchase her first home is by contributing to the down payment. My parents chose to do it differently. My parents bought my home, and I rented from them for three years. Then, when I was able to take over the mortgage payments and other home-owner responsibilities, they gifted me 1/3 of the down payment each year for three years. By doing this, they regained control of the title until I was clearly able to handle the responsibility.
