Rinar S. Erickson, CFP®, CAP®
Private Wealth Manager
When our twin boys turned 16 this past year, they began to cross the threshold into manhood: driver’s licenses, dating, and most important of all, job applications. It was their responsibility to get a job and it did not take them long to get hired at Wendy’s, the closest fast food business near our house. I sat down with them and looked at the benefits that Wendy’s offers and as is typical with a majority of businesses, Wendy’s offers a 4% match on their 401(k) plan. My boys and I strategized on how they could allocate their money as they started earning paychecks. I informed them that they needed to talk to their manager about enrolling in the 401(k) plan, to maximize all benefits the company offers and to get them started on a solid financial future. However, the manager incorrectly told them that they were not old enough to enroll in the 401(k) plan. After insisting that he check with corporate, the error was corrected and my twins were enrolled.
As the father to six children, I have learned that the best kind of financial education we can give children is through experience. My twins were able to experience a real world situation as they filled out 401(k) enrollment forms and felt the pangs of state and federal income taxes, FICA, and social security deductions. These financial realities are best learned early. However, learning what money is and how it functions in the real world can begin at an even younger age. The sooner they make the connection between work and money, the better. They will know that money does not grow on trees or magically appear in smartphone apps.
When you make fiscal education a priority in your household and give your kids a chance to make foolish mistakes, they will have a chance to learn by their own experiences how to manage money responsibly and feel the consequences of poor decisions. They cannot be expected to automatically develop a money conscience if someone else controls their conscience for them, preventing them from ever making any mistakes while they live at home. For example, one of our employed sons has learned the costly reality of eating out every day. Fortunately, he has made this mistake now while we provide a roof over his head and a soft place to land. We never bail him out, so the onus is solely on him. Yet while he lives at home, he has the leeway to make financial mistakes without the risk of not being able to pay his rent or other financial obligations that can affect his credit score for decades.
Allowing children to manage their own money early is critical to an experienced-based financial education. Let them earn money by doing chores, getting good grades, or whatever works with your family’s lifestyle and values. The important thing is that children see the connection between work and money. We have a five-year-old daughter and she loves it when she earns money. As soon as the money is in her hand, she immediately wants to go to the dollar store. I am a huge fan of the dollar store. Kids can learn so much when they have real buying power. It only takes a few dollars in their hands for them to learn to choose and to think through purchases. It is as simple as counting for a five-year-old, but it teaches a poignant lesson. They feel empowered as they learn how to spend their own money and they gain more confidence as they see that you have confidence in them.
With a solid connection between work and money, children can learn that money does much more than buy knickknacks and bags of candy. Encourage children to save a minimum of 10% and also to give 10%. With birthday money, allowances, and paychecks, we have made it a priority to teach our kids the importance of paying themselves first, beyond what is deducted for 401(k) contributions. A minimum of 10% is a good place to start. You can show your kids that it really does add up. It is also important to teach children to be generous. They should set aside 10% to give to their religious group or a charitable organization. This type of mentality nurtures an attitude of generosity that creates its own kind of wealth.
As a parent and a financial professional, I am a big proponent of opening multiple accounts for each of my children. As soon as they were born, I opened a 529 plan for each of my kids and a UTMA custodial account. My oldest boys now have a Minor Roth IRA, as well as the 401(k) plans I mentioned earlier. We have discussed with them the benefits of each type of account, the goal for those monies, and where it is best to save. It is especially important to nurture matching accounts. Why miss out on all that “free money”?
Matching is a real incentive. Companies know this and so do we. In our house, we have always matched their savings dollar for dollar. It does not take them long to see the benefits of “free money” in these matching dollars and because we have been doing this for many years. It was not difficult for the twins to quickly get on board with enrolling in their matching 401(k) program. Free money should always be claimed, every time.
Finally, the most essential part of our children’s financial education is the importance of spending less than they make. Teach them to budget their money. It is an invaluable exercise to have them spend a designated amount of time tracking their assets and liabilities. For instance, as our son tracked his Wendy’s income and then all of his out-to-lunch deductions, it did not take him long to see how much money he was wasting. Without a lecture from us, the spreadsheet was the only sermon he needed.
Give your children guidance by helping them set up accounts and allocation systems, encourage savings by matching what they save, teach them the importance of budgeting, and above all, let them make mistakes. As long as you let them feel the consequences of both good and poor money choices, a financial mistake that might cost them hundreds or even thousands now will most assuredly save them from making truly devastating mistakes when they become adults. Teaching them to enroll early and fully in a retirement plan (when available) and to have an attitude of savings and generosity will set your children on a path of financial abundance that will last a lifetime.
This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.