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How to Set Your Child Up Financially

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11 Ways to Set Your Child Up Financially
Whether you are planning to have kids, have young children already, or your children are a bit older, you’ve probably spent a significant amount of time wrapping your head around what having children means for your own personal finances. At some point, however, if you’re like most parents, you’ve started to wonder about how to set your child up financially. It’s an important topic, for sure, and one that you want to start addressing as early as possible.

As parents, we want our kids to be prepared for the future, especially when it comes to their financial well-being and that responsibility rests solely on us. Thankfully, there are plenty of things that we can do now, as their parents, to ensure that our kids are on the right financial path.

11 Ways to Set Your Child Up Financially

Everyone wants to see their children succeed. This article will outline 11 actionable ways to help your kids financially while making a significant impact on their financial future and a real difference in their lives. These 11 steps you can take are as follows:

Open a College Savings Account

College continues to become increasingly expensive, with tuition costs constantly rising and no end in sight. Yet, having a college degree remains the single best way to improve an individual’s earning potential. In 2019, Americans with a four-year degree earned two times the average salary of those without one.

The current average cost of college at an in-state public school is nearly $10,000, and for a private school, it is more than $35,000.

A college savings account or a college savings plan (also known as a 529) is one way to set your child up financially and give them an early advantage toward a secure financial future. While earning a degree may be admirable and valuable, what is just as important is that your child starts their adult life debt-free. I would’ve loved that!!!

Creating a college savings plan or putting money into a college savings account doesn’t mean that you have to save the entire cost, nor should it be your only savings priority. Helping them save money now for a home or retirement is also worthwhile starting at an early age because college may not even be in the cards for them. However, saving for a child’s future, whether for college or otherwise, should not come at the expense of YOUR current financial stability or your own retirement. Always carefully consider how much your family can save responsibly for both.

When thinking about how to set your child up financially using a college savings account, the first thing you should do is set a funding goal that reflects your financial means. A 529 plan is the perfect place to begin. It’s an investment account offering tax benefits (whoohoo!!!) if the money is used to cover the cost of qualifying education expenses. The income tax on withdrawals for non-qualifying expenses can be substantial. Still, even if your child decides against higher education, there are ways to transfer and utilize the savings without losing too much to taxes.

One of the best features of a 529 investment plan is that you can increase contributions by asking friends and relatives to make contributions to their college savings account instead of traditional birthday and holiday gifts. The sooner you get others on board, the less money you will personally have to contribute yourself.

How to Set Your Child Up Financially with Traditional Bank Accounts

You know what they say about putting all of your eggs in one basket.

A 529 plan isn’t the only way to save money for your child’s future. When you consider how to set your child up financially, it is essential to think about how you will teach them the financial skills they are going to need to survive in the real world. One of the best ways to do that is to help them open a bank account and use it to teach them how to manage expenses. The earlier you start teaching them these important lessons, the better chance they will have for financial success in the future.

When you give a child hands-on experience in making deposits, balancing checkbooks, and withdrawing money to pay for things, you will be teaching them critical lifelong skills about money and finance (we can definitely help with that education thing!!). These lessons will instill a vigilance to help them avoid pitfalls, like overdraft fees and spending outside of their means, years down the road. After all, isn’t it better for them to make their financial mistakes at a young age, when they are under your supervision, instead of when they’re out there alone responsible for feeding themselves and keeping a roof over their heads?

Once your child is old enough to start working, have a job, or even collect an allowance for chores that they are performing around the house, you can help by encouraging them to save money. The earlier you teach a child how to save money and the importance of saving, the more likely it is that they will become financially savvy adults.

It’s never too early to get started, either. You can open custodial savings accounts for them while they’re still in diapers, just like we did. Once the child is old enough to start earning an allowance, they are old enough for you to engage them in discussions about finance and savings. Some of the first topics to discuss with a young child include the importance of saving money and how much they should be putting away.

When saving money for your kids, whether you choose a 529 investment plan, a traditional savings account, or both, most experts say the best way to build a safety net for your children is to dedicate less than 20% of your income to their savings. Though most of us don’t have that much left over, you can’t overburden yourself.

Prioritizing Your Own Retirement is a Must

I know that we are talking about setting your child up financially, so it may seem counter-productive to start talking about prioritizing your OWN retirement in this article. Like most of my other articles, though, there is a method to my madness (even if my wife disagrees), and I promise that if you bear with me long enough, you’ll get my point.

For so many American families, the roles of parent and child become reversed in later years. Children often have to care for their parents once the parents have retired. Of course, as parents, we all want our kids to be there after we retire, but most of us do not want to rely on them entirely. Most of all, we don’t want them to be financially responsible for us. If you live by the mantra of “my kids are my retirement plan,” you might be setting yourself for big disappoint, along with disagreements and other negative items. Who wants that?

When reviewing your budget, especially when trying to determine how much to sock away for your child’s future, consider your future income, living and medical expenses, tax liabilities, and then make a plan to save for your retirement as part of your savings goals. Contributions to your children’s future and your own should be balanced because, after all, they are one and the same.

Proper Estate Planning is Crucial

According to reports, the average cost of raising a child from birth to age 17 is $233,610. When you factor in the price of college, which is not already factored into that figure, the numbers are kind of insane. Some calculations say $1 million. That’s a ton.

The fact is that raising kids is an expensive endeavor! You become a human ATM (Always Taking Money) machine.

While it may not be the most enjoyable topic to discuss, you need to consider the effect you or your spouse’s sudden death or disability might have on your child’s financial future. Less than a year after Mak & G were born, I won a company trip for myself and my wife, and the thought of something happening to us both at the same time got REALLY real.

It is imperative, especially if you have young children that you do everything you can to ensure that they are supported financially if this were to happen. If the emotional devastation wasn’t enough, it can seriously sidetrack any financial goals you have set up for your kids. That’s why life insurance is a crucial component when figuring out how to set up your child financially.

How to Set Your Child Up Financially By Having the Correct Insurance

Good life insurance is perhaps the most important of all the different kinds of insurance we should carry, especially for working parents whose families depend upon that income. Thankfully, most full-time employers offer life insurance, typically covering one to two times the employee’s yearly salary. That won’t be enough to cover the essential expenses in some cases. That means you will need additional life insurance coverage.

The key to ensuring your child’s future financial security in case of your untimely death lies in your insurance portfolio. The best way to decide whether or not you have adequate insurance coverage is to determine how much money you’ll need to achieve your family’s existing goals. For example, maybe you want to make sure that there is enough money available to pay your home’s existing mortgage in case of sudden death. This way, you eliminate your family’s need to worry about that expense. Think about other costs when considering a life insurance policy, such as college tuition. You also need to make sure that you have the right policies and that you are not buying insurance just for the sake of having it.

You don’t need to think about life insurance policies as something that will happen to your children when you die. Instead, think about life insurance policies as another great way to ensure their future financial stability, the same way you think about setting up savings accounts or teaching them about the importance of healthy financial habits.

Prepare Your Will and Appoint Guardians for your Kids

In addition to life insurance, especially if you are concerned about setting up your child financially, is to make sure that you have a last will and testament. This includes making sure all the other appropriate accompanying documents are in order. If you haven’t done this yet, stop reading this article right now, pick up the phone and do it. I’ll wait. Tick tock….

No, seriously. It really is that important!

You see, a last will and testament is a legal document that outlines exactly how it is that you want all of your assets to be distributed in the event of your death.

An essential component of this document, if you are the parent of a minor child or a child with special needs, is the appointment of a guardian. This guardian will ultimately be the individual that takes care of them when you have passed away. Don’t just pick your favorite sister or brother. Think about the right person. I love my siblings, but not everyone is up to the task they way I want it to happen.

Depending on your state, the guardian will be the one who is responsible for the child until they turn 18 or 21. Essentially, they become the parent to your child. Should you fail to appoint this guardian for your child, a court will choose one, or the child may be forced into foster care. The only way to have control over your child’s future in this situation is to make sure that you appoint a guardian in your will. Don’t leave this to chance. Please.

When you have a solid last will and testament, you ensure that your kid is protected should something happen to you. It should be a top priority in all of your estate planning efforts. Choosing the proper guardian is just as important. There are two types of guardians that you can name for your child. One person can be charged with physically caring for your child, while the other can be designated to oversee your child’s assets. You don’t want to choose just anyone to fill these critical roles. It is essential to give this choice the serious consideration it deserves. The wife and I got into some really “robust” conversations about this. It’s not always easy.

Talk About Money With Your Kids and Involve Them in Financial Decisions

If you are looking for a sure-fire plan for how to set your child up financially, you’ll want to teach them how to be financially literate. One of the greatest ways to build a child’s financial literacy is to involve them in your family finances.

How do you do that? Well, take them to the bank every time you open an account or when you apply for a loan, exposing them to financial language. If there’s something that they want that isn’t within the family’s budget, explain why and help them develop a plan to make it happen by saving money. Help them be creative and develop innovative ways to get what they want. You might be amazed at what they come up with!

When you engage your kids in this way and involve them in financial decisions that affect the whole family, you will help them develop budgeting skills while teaching the basics of financial literacy.

Far too often, the subject of money and finance is taboo among families. However, it really shouldn’t be. When we treat the subject as something secretive, we foster unhealthy attitudes toward money and do a terrible disservice to our kids. As parents, we should be talking to our children about money from an early age, and we should be talking about it often. After all, we know that money makes the world go round!

Studies have shown that children of all ages pay close attention to family issues related to money and finance, regardless of whether we discuss finance with them or not. So, it stands to reason that involving them in the discussion from an early age will be more beneficial than not. When we are open to discussions with our children about money, they have a better chance at future financial security and they’ll be much more comfortable discussing and dealing with it.

I’m not suggesting that you discuss your mortgage refinance or investment portfolio with a seven-year-old (though, if presented in an age-appropriate way, it’s never too early to teach them about related concepts). However, there is no reason why they shouldn’t help you create a shopping list the next time you plan to buy groceries, providing the perfect opportunity to discuss the cost of food and the importance of a family budget. Maybe the next time you take a vacation, you can involve your child in budgeting for the trip. You’ll be surprised by how much the child will remember later in life from early, repeated conversations about money.

Show Them the Money

Many people disagree on money concepts surrounding allowances, especially around just how much to give and for what purpose. Some parents offer a “no strings attached” allowance as a way of simply teaching them about money and giving them something as they learn financial concepts. For parents in the “money doesn’t grow on trees camp,” allowances are given as income for doing specific age-appropriate chores and jobs around the house.
Regardless of the method, studies have shown that kids receiving a regular allowance are much more likely to grasp the importance of money and have a better understanding of finance than children who don’t receive an allowance. To make sure that your child truly benefits from earning an allowance, make sure that the money you give them comes with important lessons about money and finance.

Introduce Your Children to the Concept of Investing

When the child is old enough to understand the concept of delayed gratification and can exercise patience, help them to set up their very own investment account. If they earn income from a part-time job, consider a Roth IRA. A mutual fund can offer long-term growth through a “set-it-and-forget-it” approach.

A great way to get them involved in the stock market for the first time is to gift them shares of stock in a company that they are familiar with, such as Nike, Apple, or Disney. It is a great way to introduce them to the stock market and teach them about investing. With these methods, a child can learn the value of investments and, hopefully, appreciate our favorite type of growth, compounding interest!

Teach them the Save, Give, and Spend method as a Budgeting Primer

Here at Educounting, you’ll find no shortage of different approaches to teaching kids about both saving and spending their money. We like this one, made popular by personal finance personality Dave Ramsey. It’s called the envelope system. In this method, money is divided into three categories:

  • Spend
  • Give
  • Save

The technique is perfect for younger children who are just starting to explore money concepts. When a child earns money from a gift or an allowance, the money gets divided into the three envelopes. Let’s say your child made $20 in birthday cash. They place $10 into their “spend” envelope, they place $3 into their “give” envelope,” and they put $7 into their “save” envelope.

In addition to teaching the child essential lessons about budgeting and saving, it also emphasizes making charitable contributions. It’s also very visual. When you instill these concepts into their minds at a very young age, they become the foundation for long-term financial success.

Make Your Child An Authorized User on Your Credit Card

A great thing that you can do for your older child is adding them as an authorized user on a credit card their own. If you do this while they are a teenager, you can help them build a decent credit score by the time they reach the age of 18. That will allow them to independently qualify for auto loans, credit cards, and student loans and even help them get preferred interest rates. It can also be a valuable exercise to teach them how credit works.

It's Never Too Early to Set Your Child Up Financially

We hope that you found these concepts on how to set your child up financially to be helpful. As you can see by this list, there are many steps that a parent can take right now to protect their child’s financial future. It’s never too early!

Most kids will not grow up having silver spoons in their mouths, and most parents wouldn’t want them to anyway. Growing up with money often means that the child won’t learn the true value of a dollar. It is, of course, a parent’s natural desire to do what is best for their children, especially when it comes to their financial future.

Our kids aren’t going to be young forever. One day they will leave the nest and be out on their own. If we instill the correct values in them now and help them learn the fundamentals of financial literacy, they will have a good chance at a financially secure future.

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