Since the birth of a child, you have been supporting them every step of the way. But there will come a time when they have to leave home and live independently. At that moment, you will hope that they have the confidence to face real-world financial challenges. However, it’s not an easy task.
According to research from the National Endowment for Financial Education (NEFE) in the United States, one in five American teenagers lacks basic financial literacy skills. But this situation can be changed. By starting early, you can help guide your child onto the path of financial independence. Let’s start from here.
Children may earn some income through part-time jobs, summer jobs, or allowances. It’s important to encourage them to save this money in a safe place, such as by opening a checking account for them.
If your child is under 18, you will need to open a joint checking account with them. This way, both you and your child can use the account. However, this also means that you both bear responsibility if the account is overdrawn or charges fees.
This is why it’s crucial to compare different options and not just choose the bank closest to home to open a youth account.
Carefully compare and choose accounts that have no monthly fees and minimal balance requirements. Additionally, check if there are parental control features available.
Some accounts can set spending limits, such as restricting ATM withdrawals and debit card spending.
Some accounts even earn interest. Furthermore, ensure that the bank where the account is opened is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA). Typically, these institutions provide up to $250,000 in protection for accounts.
It is crucial for teenagers to understand the importance of saving and compound interest early on. Establishing a secure emergency fund can be done by opening a savings account or a money market account.
Similar to a checking account, you will need to open a joint savings account with your child. Also, carefully compare different options available.
Banks and credit unions offer competitive rates or annual percentage yields (APYs) for such accounts. According to data from the FDIC, the average APY for savings accounts is 0.39%. However, some accounts can offer up to 5% interest or even as high as 10% for higher balances.
Simply opening a savings account isn’t enough. You also need to instill financial habits in your child, encouraging them to save for their expenses. For example, if they want the latest electronic gadget, instead of buying it for them outright, encourage them to save up for it. This allows them to understand the benefits of delayed gratification and feel a sense of accomplishment when they can purchase something they like through effort and savings.
While living at home, children may not have significant expenses. But eventually, they will face a variety of expenses like you.
You can show your child your budget, take them grocery shopping, and explain how you allocate your income for rent, utilities, transportation, and food. This way, they can understand the real costs of living and the difference between “needs” and “wants.”
This also serves as an opportunity to gradually expose children to actual expenses. For instance, have them take on more or even all of the phone bills and music subscription fees (like Spotify). This teaches them how to manage budgets and save money on their own.
One of the best ways to accumulate and maintain wealth is through smart investing. So, how can children start investing? You can start by opening a custodial securities account for them.
A custodial account allows you to manage an investment portfolio for your child. Once they reach adulthood (either 18 or 21, depending on the state), they will have full control of the account.
During this period, you can educate your child on how you manage the account.
Set a goal for the account, such as using it for additional funds for college or to kickstart them into the workforce.
Overall, involving your child in the process is key. Discuss with them the investments in the account and why you made those choices. Explain investment strategies and show them how the account grows over time. This way, they can truly grasp the importance of compound interest and understand market fluctuations.
Just like with savings and checking accounts, comparing and selecting the right custodial securities account is crucial.
The best custodial brokerage account providers typically offer low fees, diverse investment options, and robust financial knowledge tools.
If you are not familiar with investing yourself, consider a robo-advisor for the custodial account. These online platforms combine advanced algorithms with the expertise of professional investment managers to recommend diversified investment portfolios based on your child’s investment goals and financial situation. The account is managed automatically, so you don’t have to handpick investments yourself.
Whether you choose investments yourself or leave the decisions to algorithms, understanding one key thing is vital: there are mainly two types of custodial brokerage accounts.
One type is the Uniform Transfers to Minors Act (UTMA) account, which can invest in almost any asset, including real estate and alternative investments.
The other type is the Uniform Gifts to Minors Act (UGMA) account, which has a more limited investment scope, only allowing investment in cash, stocks, mutual funds, and insurance policies.
According to the research by credit bureau Experian, consumer debt in the United States has risen to $17.57 trillion, with an average debt balance of around $105,000 per person.
However, your child doesn’t have to be a part of this statistic. Cultivating good credit habits can start now.
You can add your child as an authorized user on one of your credit cards, preferably one with a lower credit limit. It’s essential to teach them the importance of making timely payments and ideally paying the full balance each month when possible. Encourage them to keep a low utilization rate as these are the most critical factors that affect credit scores.
Of course, it’s easier said than done. Teenagers enjoy spending, and having a credit card can easily lead to a lifetime of debt and poor spending habits. Therefore, it’s important to monitor their spending habits closely and have serious conversations with them about their consumer behavior.
The moment a child gets behind the wheel for the first time is a significant one for them but can be a source of worry and stress for you. Additionally, it can be a considerable expense for both you and your child.
According to data from insurance platform Zebra, 16-year-old novice drivers pay an average of $7,658 annually for car insurance, over three times more than the average of $2,189 for a 30-year-old driver.
Insurance companies view inexperienced drivers as higher risk. Unfortunately, the data does prove this to be true.
However, there are ways to reduce these costs. You can add your child to your insurance policy, which is generally cheaper than them obtaining their own. You can also apply for good student discounts, as some companies offer discounts to students with a GPA of B or above 3.0.
Consider enrolling in a telematics program. These programs monitor driving behavior through devices or apps and offer discount rewards based on safe driving habits.
Part of transitioning to financial independence is making mistakes and learning from them. Teenagers, in particular, are prone to making poor financial decisions. But resist the urge to always clean up after them, or they’ll think you’ll always bail them out. Sometimes, you have to let them solve their problems on their own. However, as parents, you can provide the appropriate level of support depending on the situation.
Helping your child understand the basics of budgeting, saving, and investing, as well as their importance, can set them on the path to financial independence and wealth. But this journey is not easy. Nonetheless, by guiding them early on and assisting them in opening checking, savings, and investment accounts, you can make a difference. What truly sets them apart is the unique guidance and teachings you provide. By reviewing your financial situation together, help them understand the value of money and real-life expenses.
(This article is a rewritten and translated version of a news article originally published in a Chinese-language publication, with all original attribution and copyrights removed.)