Important Money Tips That Can Help You Prepare Your Child For a Lifetime of Financial Freedom

By Susan

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Last Updated: September 2, 2021

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Finances are becoming the number one source of stress for Americans. Financial literacy is likewise lacking in this country, which is unsurprising. Even though financial literacy programs are on the upswing, we still have a lot to put in place.  These suggestions discussed in this article will help young people prepare for a financially successful future, and will teach parents how they may assist their children in getting there.

 

1. Invest frequently and early

Saving money for the future, whether it's for retirement, a vehicle, or a house, is probably the last thing on a child's mind. However, getting started early will help them to profit from compound interest. The "snowball effect" occurs when interest is gained on money that has already been generated as interest. When children invest early and frequently, they may reap the full advantages in the long term.

What to do first: A parent can create a custodial brokerage account in the kid's name if the youngster is under the age of 18. Some of their money should be invested, while the rest should be kept on the sidelines in case of a market downturn.

Perhaps, try matching a portion of what they invest to motivate them. Index funds are a fantastic choice to start with. 

If they have earned money and are 18 years or older, a Roth IRA is a wonderful option because the growth is tax-free. Traditional IRAs are financed using pre-tax money, and Roth IRAs are funded with after-tax monies. Because individuals must earn less than $140,000 in 2021 and couples must earn less than $208,000, a Roth is an excellent option for young professionals. People under the age of fifty are eligible to donate up to about $6,000 each year. But keep in mind that this is a retirement savings account, and while you may take your Roth deposits at any time without penalty if profits are withdrawn before 59 years of age, then penalties will apply.

 

2. Establish an excellent credit history

Not all of us are taught that excellent credit begins with borrowing and that taking on a small amount of debt may be beneficial. However, be wary of credit card issuers' teaser rates, which may quickly climb into the double digits. Do you recall compound interest? When it comes to saving, it's fantastic, but when it comes to borrowing, it's terrible.

To begin, your child should create a credit card in his/her name that is connected to their bank account when they reach 18. Make an automated payment for a modest, recurring payment, such as Netflix or their telephone bill. After that, they should set up an automated payment from their bank account for their credit card bill. They will never get a late payment since they are establishing their credit history in this manner. A secured credit card is the greatest option if your youngster does not match the requirements for an unsecured credit card. This card will have a credit limit of 500 dollars, which will be secured against their deposit. And it can be used to establish credit before applying for an unsecured card.

 

3. Make prudent borrowing decisions

There will still be a moment when your children will have to borrow, so educate them on how to do so properly. They will be able to acquire a lower rate and incur a lesser interest over the term of the loan if they have an excellent credit score.

What to do first: Teach your children the difference between what we called a "bad" debt (such as a vehicle loan or credit cards loan), and a "good" debt - investment into our futures (such as a home or college or mini-business loans). While your child may need to borrow money for school, it is not a good idea for them to purchase a vehicle they can't afford or max out their credit card.

Before taking out a loan, check around for the best interest rates. Let them know that they should never borrow more money than they can afford in the hopes of getting a salary raise or a new job.

 

4. Budgeting

Managing their expenditure entails determining what their funds are being spent on.  Build-in them a habit of keeping track of their expenditures through budget creation. Making a budget will enable them to see where they may cut expenses in order to begin saving and investing more money for their future.

What to do first: Introduce your children to budgeting apps like Mint or Quicken, which combine their accounts and allow them to monitor their expenses and manage their funds. It is simple for them to use their credit card to pay for anything, but if they learn they spent $200 on just DoorDash last week, they may reconsider touching their credit card the next time they crave for such. Giving your children an allowance for performing their domestic chores might help them develop this habit early on. Assist them in creating a small budget so that they may learn about money management. Encourage children to save for things like a new bicycle, a new toy, or a new video game.

 

5. Live within your means 

There are several items on which children spend money without even noticing it. Think about it:  new telephones, expensive lattes, fancy clothing, and so on. While youngsters should be allowed to indulge themselves now and again, be sure their spending does not rule them. They are living over their financial capabilities if they are unable to pay off their credit card each month.

To begin, advise and encourage your youngster to take a step back and consider what is most important to them. Before making any purchase with their credit card, they should consider whether they truly need such an item. Encourage your children to get a summer job as a method to teach them this lesson. They will be able to make their own spending errors and learn from them now that they have their own money. They may reward themselves every now and again, if they deserve it and, more importantly, if they can afford it.

 

6. Understand that investment isn't the same as gambling

 As a parent, you must let your children realize that investing is not the same as gambling. I'm not against someone using a modest amount of their money (let say 15 percent) to bet, but such a person must be prepared for whatever the outcome turns out to be. Gambling entails the risk of losing everything. Anyway, it's not always a bad thing to learn a valuable lesson.

By involving your children in the investment process if you create a custodial account or a Roth IRA for them. Allow them to pick a few firms in which they want to invest, and you'll be surprised at how enthusiastic they get. You may go through annual statements with them as well so they can see how their investments and savings are doing.

 

7. Always have emergency money on hand 

You never know what might happen in the future, as the epidemic has demonstrated. Millions of individuals have lost their jobs and have been seeking new ones for months. Your children should understand the value of having separate money that can cover seven months' costs of living that they may use in the case of any emergency. They will soon grow up as a young adult with bills to pay, like rent and credit cards. A support system will be provided by having an emergency fund. It's also critical that children understand the distinction between investments and cash. Encourage them to save away some money for day-to-day expenditures as well as major prospective purchases.

What to do first: Taking your children to the bank to create a savings or current account for them is a good idea. Take any cash gifts they get for a holiday or birthday back to the bank and have them save a part of it. Saving will become a habit rather than a job as a result of this.

The significance and relevance of financial literacy can be seen and felt on a daily basis. And, as parents, one of the most important things we can offer our children is the ability to develop lifelong financial habits. One of the legacies you're passing on to your children (and grandchildren!) is a strong financial literacy foundation. As a result, you'll bring good change to your family and the rest of the world.

 

Photo by Annie Spratt on Unsplash

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