The kids are finally back in school after a nice summer break. What will they learn? Depending on their age and grade, they’ll be learning everything from history to biology, from math to archaeology. However, there is probably something that will be sorely lacking from their curriculum–personal finance.
Today, more than ever, the tools for creating wealth—such as tax-advantaged investment accounts, mutual funds, and ETFs—are within reach for nearly everyone, including young people. However, these tools lose their value if one doesn’t have a foundational knowledge of financial literacy, such as budgeting, taxes, basic investing principles, managing debt, and the difference between assets and liabilities.
Despite recent progress, 47% of U.S. students still graduate without taking a mandatory personal finance course. And let’s be realistic—one course alone isn’t enough to cover everything they need to know. That leaves it up to us, as parents and wealth builders, to instill financial literacy in our children. By doing so, we can help them develop the mindset of making their money work for them rather than relying on a paycheck. Ultimately, this path will lead to more than just financial independence– numerous studies confirm that it will also foster growth and development in multiple areas of life.
Involving Children in Family Finances Early On
Research shows that curiosity significantly enhances early academic achievement, especially in subjects like math. Therefore, we should make it a priority to ingrain a strong sense of curiosity in our children at a young age. Some easy ways to get them involved can be as simple as comparing prices at the grocery store and letting them decide what to purchase – within limitations, of course. Allowing children to participate in financial decisions will fuel their curiosity and help make financial literacy a natural part of their lives from their earliest years.
Introduce an Allowance System
The three-bucket system is a popular money management strategy that breaks one’s savings into three ‘buckets’ based on when the money will be needed: short-term, medium-term, and long-term. The short-term bucket holds easily accessible funds, the medium-term bucket is for income-generating assets, and the long-term bucket is for investments that grow over time.
Why not introduce the same concepts within an allowance system in exchange for chores around the home or business? Start by discussing what they’d like to spend their money on and encourage them to set aside a percentage into different “buckets” or envelopes for more costly goals.
Research indicates that early financial experiences, like earning an allowance, have a long-term impact on one’s financial decision-making and well-being. An allowance system fosters a goals-based financial mindset and builds their internal locus of control, setting the stage for better financial habits as they grow.
As your children become teenagers, you can review your own budget and introduce them to terms like assets and liabilities. Explain how debt can either be a tool for growth or a trap and how careful budgeting can keep them on the right track. Teaching them to live within their means is a vital lesson in today’s credit-driven world!
A Word for Business Owners/Parents:
If you’re a business owner, you can hire your children to work for your company and reduce your taxable income. If they’re under 18, their earnings may be exempt from Social Security and Medicare taxes. In 2024, you can pay them up to $14,600 without being subject to these taxes.
Explore Basic Investment Principles and Teach Tax Awareness
By their teenage years, many kids are aware of stocks, bonds, and interest rates, especially if they take an economics course in high school. Before they step into adulthood and gain access to tools that make buying a stock as simple as posting a photo to Instagram, it’s a great time to introduce them to mutual funds, ETFs, and the importance of diversification. This will help prevent them from going all-in on a single stock or purchasing complex investments they may not understand, such as options. It will also emphasize the importance of steady, long-term growth rather than chasing trends or falling prey to FOMO, setting them up for success. If you have been contributing to a 529 plan, you can show them its asset allocation and explain how it’s changed over time as they get older.
Investing and taxes go hand in hand, and every dollar you overpay could be seen as a lost investment opportunity. The first time your teenager sees a chunk of their paycheck taken out for taxes, use it as a chance to explain simple tax strategies, such as paying less tax by contributing to a Traditional IRA or the prospect of tax-free growth and withdrawals with a Roth. Hopefully, they’ll get the hang of managing their tax brackets early on. Imagine a 25-year-old maintaining a lower tax bracket while looking forward to tax diversification in retirement! It’s possible with the right education and mindset instilled in them.
Encourage Charitable Giving and Social Responsibility
We all wonder how we can leave our mark on the world. While not everyone can be a genius inventor, groundbreaking scientist, or renowned statesman, each of us can leave a legacy by helping others and making a positive impact. Research shows that the children of parents who engage in charitable activities are more likely to continue this behavior into adulthood. This is great, of course, but the benefits go beyond just making a difference–it also affects children in ways that will have lifelong implications for the better. Getting involved at a young age can improve mental and physical health, enhance career prospects, boost self-confidence, and build character.
What does that have to do with financial savviness? Like investing, charity is deeply intertwined with taxes and financial planning. Donating can be conducted in a tax-savvy manner via a variety of methods, such as charitable remainder trusts and donor-advised funds.
SIDE NOTE: Reductions to the lifetime gift and estate tax exemption limits are imminent— is your estate plan ready?
Aim for Financial Independence
Ultimately, the goal is financial independence—the freedom to live life on your own terms. Wouldn’t it be nice to set your children on that path now, rather than having them figure it out years later? Your children may not fully grasp these lessons today, but they’ll surely thank you tomorrow.
If you have any questions regarding your own financial plan or what investment tools you can utilize today to get your children started, we’d be happy to review your situation. Just click the button below to set an appointment.
