As the CEO for your family, you are responsible for managing many things: From soccer practice, to virtual learning, you need to lead your family toward a bright future. At Buttonwood, we serve as the CFO for many families, and often encourage the inclusion of younger generations in the family financial planning conversation. By sharing good financial habits with your children and grandchildren, you are providing them yet one more tool they will have as they become CEO’s of their families!
The importance of money management isn’t high on the curriculum in elementary and secondary school, so it’s up to you. If you think it’s too early to start, studies have shown it’s probably not! Once children can add and subtract (usually at 6-7 years old), they are often ready to learn more about finances.
If you have children, you have likely thought about college and what the future holds for them. Your Family CFO may recommend a 529 plan account to save for future education because of tax benefits. As you contribute to the 529 plan, explain to kids what you’re doing and why you’re doing it. Inclusion in this significant piece of your family financial planning may also help to get them excited about going to college!
For children under age 10, we recommend starting with the basics. If you don’t already, consider providing your kids a weekly or monthly allowance. When positioned properly, an allowance can be much more than just giving kids some spending money. There are many ways to weave in education along the way. You can show firsthand how the successful accomplishment of tasks beneficial to others results in financial rewards that can turn into benefits important to your kids.
As kids mature, another successful idea we have seen is the incorporation of a ‘family tax.’ As kids’ allowances increase over time, it can be a good opportunity to learn about the tax system. Higher income means it’s time to contribute to the well being of all by reserving some percentage (10%+/-) as a family tax. Save up your family taxes and let the kids help plan your next vacation. They are likely influencing the the outcome anyway, so if they can engage in real world experiences; all the better. As part of their contribution they have a vote to determine where to go, what to do and more. Bonus: Give your kids a sense of accomplishment from their contribution!
Thinking back to the 529 plan… This account likely holds traditional stock / bond investments and thus an opportunity to begin talking with older kids about investments and asset allocation. If this is something you would rather outsource to your Family CFO, we would be happy to assist.
Kids who are older and becoming more independent may be ready to become more involved in family financial planning. Share a high-level family budget with them to provide a better understanding of how much money comes in and goes out each month for expenses, taxes, savings, etc.
As your younger generation enters high school, it can also be beneficial to bring them to your strategy update meetings. As a Family CFO, our multigenerational approach includes educational opportunities for younger generations. At this age, many kids are also entering the workforce with their first jobs.
You now have an opportunity to include them in the knowledge gained by having their own checking and/or savings accounts to learn the difference between longer term investments in their 529 plan that can go up and down in value but have the likelihood for higher returns, and short term, no risk, but low return interest from banks. We recommend online banks, brokerage firms or banks with a national presence. This will prevent your student from having to switch banks depending on where they decide to go to college. Many of the brokerage options have no account fees, free checking and no currency exchange fees, if kids happen to be traveling overseas for study and/or vacation. Several will even rebate fees from any ATM on the planet!
Now that your child has their own bank account, a better understanding of taxes and investments, it’s time to get them used to saving for their future! As soon as kids have earned income they can take advantage of the tax benefits of a Roth IRA. Many kids may not be incredibly excited at the idea of putting money into an account for something like retirement that can be decades down the road. If this is the case, you can offer a ‘match’ – You contribute $1 and we will match it (up to the contribution limit allowed by the IRS). There are many “future value” calculators on the internet and by taking the time to show kids the incredible power of compounding they can easily see how they can become ‘a millionaire’ if they just contribute a few thousand dollars a year to their Roth IRA and let it grow. If all else fails, assuming kids have earned income, parents can make contributions to a Roth IRA each year for them up to the maximum amount allowed by the IRS. An amazing opportunity for a head start in life!
Assuming you have included kids in family budget and 529 plan funding discussions, when it’s time for kids to explore which schools they may want to attend for higher education, the stage is already set for a real conversation. Add up the 529 plan balances and what ‘extra income’ is available to pay for the cost of college. If there is a shortfall between what school costs and what is available, the opportunity now exists to talk about the costs of a ‘3 or 4 year plan’ vs 5 years or more, in-state vs out-of-state tuition, summer jobs and student loans. College costs are one of the largest expenses a family can have, and while the long-term benefits are certainly proven, making kids aware of what it costs can greatly improve their motivation to excel.
After years of being involved in the financial side of life, once they are in college, and the tuition bill is due, have the kids write the check from their own checking account to pay the bill. All those zero’s look quite large when compared to the average kids’ “pizza” budget. Of course, you will want to transfer money from the 529 plan and/or your account into their checking account so the check doesn’t bounce and they learn another financial lesson the hard way.
In summary, it truly is never too early to include younger generations in family finances. When kids understand finances on a deeper level, they are more likely to make the right intuitive financial decisions in the future.
Buttonwood Financial Group serves as multigenerational Family CFO, working with you, as the CEO of your family through all stages of life. From birth, to college, to families of their own, your kids are family to us, and we are here with them (and you) every step of the way. Contact us today to learn more about our multigenerational financial planning approach.
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