9 Tips for Teaching Kids to Save
How can you encourage young people to develop their financial literacy and independence? Two Schwab specialists offer their advice.
Consider your personal finance education. Did you study financial management at home? in class? by means of trial and error?
When people discuss their own financial education, Carrie Schwab-Pomerantz, CFP® professional, president of Charles Schwab Foundation, managing director of Schwab Community Services, and board chair of Schwab Charity, says they frequently express regret over not learning the essentials sooner. Furthermore, having a strong grasp of money management when you first enter the workforce might give you a significant advantage over your peers.
Sadly, a lot of young people aren't being taught the essentials of financial independence, like setting a budget, making investments, and saving money. In order to graduate from high school in 2022, only 23 states will mandate that students take a personal finance course, according to the Council for Economic Education. 1
According to Chris Kawashima, a senior research analyst at the Schwab Center for Financial Research and a CFP® practitioner, "it's really up to each of us to make sure our kids are prepared to thrive as adults." Instead, it can take them years to figure it out while they spend excessively and save insufficiently—both of which are major obstacles to financial security.
Here, Carrie and Chris offer their best advice on how to help your child develop sound financial practices at three formative ages.
1. Explain the importance of money.
A decent beginning step is an allowance, especially if you connect at least some of it to tasks that instill responsibility and a solid work ethic. Kids learn about the importance of money and making their own decisions by earning an allowance. Kids frequently discover that they make different decisions with their own money than they would with someone else's, according to Carrie.
2. Highlight saving
Your children will eventually have wants that exceed their allowance. By encouraging children to put money aside for those things, you are teaching kids about delayed gratification and trade-offs. Establish a habit of saving a tiny percentage of every cash they receive, including allowance and gifts—say, 10%.
3. Get them started with investing
If your children have some savings, you might think about setting up a custodial brokerage account for them or assisting them in buying fractional shares. Your youngster can learn the value of conducting research and maintaining their possessions in addition to developing a sense of ownership. Remember that custodial accounts could have certain tax implications, so it's always advisable to check with an advisor to make sure they would be appropriate for your case.
"Let them pick a few stocks to buy. Afterward, schedule frequent meetings to evaluate their work "Chris offers. You might be surprised by how interested children might be in making an investment in a firm they are familiar with and like.
4. Promote summer employment
According to Carrie's research, young adults who are employed are more likely to be long-term better savers. Make sure your child is saving money from each payday, and you might even need to ask them to help with other bills. She claims that it is appropriate to demand that children pay for their own gas and movie outings.
5. Make them creditworthy
Enrolling your child as an authorized user on one of your credit cards might be useful when teenagers become more independent and begin to drive themselves around. A credit card is always a good idea, Carrie notes, "from a practical standpoint, to deal with emergencies like flat tires." More importantly, if you make your kid repay every cent they charge, they can learn to live within their means.
This is also a wonderful time to talk about how important credit responsibility is. Lenders are more likely to have faith in you the next time you need to make a significant buy if you accept responsibility for repaying borrowed funds.
Chris highlights how crucial it is to lay out the fundamentals, such as how debit cards and credit cards differ from one another. Also, it is crucial to inform children about the risks associated with high-interest debt and revolving credit. He emphasizes that "the more kids understand about debt, the more likely they are to manage it responsibly."
6. Think about a Roth IRA
Your children can begin making contributions to an individual retirement account once they begin earning money (IRA). Chris advises Roth IRAs for the majority of young savers. Roths are paid for with after-tax money, but withdrawals made in retirement may not be taxed at all, he says. 2 "Kids could profit from decades of potential compound growth and tax-free income in retirement by financing these accounts early—when their income, and hence their tax rate, is still relatively low."
7. Assist them with budgeting
As soon as your children accept their first jobs following graduation, assist them in creating budgets based on their salary and anticipated spending. When you've never lived alone, it's simple to underestimate regular costs like groceries and electricity, says Carrie.
Review their work benefits with them as well to make sure they're utilizing them to their fullest potential, especially any matching contributions to employer-sponsored retirement plans like 401(k)s. It's crucial that they comprehend the significance of those matching contributions, according to Carrie. "It's like getting free money!"
8. Motivate them to continue investing
Educate your children on the importance of time as their biggest ally in the world of investment. You can never tell youngsters enough, adds Chris, "Time in the market is better than timing the market."
There are practically thousands of low-cost index funds to pick from when it comes to investments, which might be overwhelming for a beginner. When in doubt, the best course of action may be to select a product that allocates and invests their money on their behalf.
A target-date fund is one such choice, whose asset allocation mix grows more conservative as the target date gets closer. A robo adviser is a different choice that constructs, monitors, and rebalances an investor's diversified portfolio of exchange-traded funds.
9. Reassure them that they are not alone
Although you want your children to be fully autonomous people, there may be times when you need to step in and keep them on track. After all, making bad financial choices can be a costly lesson to learn.
Also, Carrie advises exposing them to your financial experts if they have any questions that you are unable to resolve. You want children to develop the habit of seeking assistance when necessary, not just from you, she advises. Even experts need assistance; I know I do. It all begins at home.
Georgia and Michigan recently approved laws requiring at least a half-credit course in personal finance in high school, but there is still no alternative for setting a good example. State governments are working to boost financial literacy in schools. By demonstrating to your children how you set aside money for savings and investments, you can inspire confidence in them that they can attain their goals.