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Smart Finances for Kids

February 24, 2021

Smart Finances for Kids

As parents, when it comes to our children’s future, we want to do everything we can to set them up for success. We instill the importance of a healthy diet, getting plenty of exercise, and the value of good grades. One thing we often overlook is the importance of financial health.  Teaching financial literacy and providing our children with the tools for financial success is equally as important as physical health and educational excellence.  By following these tips, you will help secure a healthy financial future for your child.

Teaching kids financial literacy

  • Wants vs. needs

This is a great lesson to teach kids, especially the younger ones because it’s a concept that can be taught at any age. Families spend their money first on needs like food, shelter, and medicine. Meanwhile, nice-to-have purchases, such as toys and vacations, should be bought only after needs have been met.

As children get older, they can further develop their understanding of a need. Clothes are a necessity, but expensive brand names outfits are not. More so, shelter such as a house is a necessity, but a personal bathroom is not.

  • Realistic vision of money

Children often lack a perspective of how money works in the real world. Kids think $500 dollars makes them rich. When they get paid $20/week for allowance can you really blame them?  Help your kids to understand the value of a dollar and how far it will go. Go over monthly household expenses to show them how much the necessities of operating a home cost.

If you feel comfortable sharing specific figures, create a monthly budget with your teen. Developing financially smart youth is not always about lesson plans, but having everyday conversations about money. Be sure to take advantage of those opportunities.

  • Time helps money grow

From savings accounts to investment accounts, teach your child that a dollar saved today could become thousands down the road.

Open a savings account with them and go over monthly or quarterly statements to show how interest affects the balance. Later in this article, we discuss starting an investment account for your child that will show how compounding interest exponentially increases money.

  • How credit works

Most lessons for children surrounding money can be conceptual, but with credit discussions, it is important to be more technical. Kids need to understand that credit means borrowing from others comes at a cost. Be sure to explain that credit is a powerful financial tool that can be used to their detriment or to their advantage depending on how responsibly they borrow.

Tax-deferred college savings plan

  • 529 Plan

A 529 plan is a type of savings and investment account in which money grows tax-free as long as the withdrawals are for qualified education expenses. They are named after a section of the IRS code. Unlike retirement and other investment accounts, 529 plans are typically operated by states. Georgia’s plan is called the Path2College 529 Plan. However, you are not limited to investing in your home state’s plan.  You can research which plans are the best fit for you based on affordability, flexibility, tax advantages, investment diversity, etc., and invest in any plan you choose.

  • Path2College 529 Plan

Contributions to the Georgia 529 plan of up to $4,000 per beneficiary per year for those filing a single return and $8,000 per year per beneficiary for those filing a joint return are deductible in computing Georgia taxable income. It’s available to any citizen or taxpayer. And just about anyone can help contribute including Grandparents, other family members, and friends.

Start an investment account early

Saving for your child’s retirement may seem like a crazy concept, especially since you may just be getting started with your own retirement savings.  But due to the compounding effects of interest, just a small amount set aside each month for your child now (whether you make the contributions yourself, or invest money that your child earns on their own), could add up to a comfy sum when they retire.  For example, if you started putting $100 per month into an investment account on your child’s 10th birthday and continued until they turned 18, assuming an eight percent rate of return, they would have $12,963 in their account.  If they left that money in the account, without adding another dime, 40 years later they would have $281,615. Then assume that your child continues what you started but increased their monthly contribution to $100 a month for the next four decades.  At the end of 40 years, they will have accumulated $592,444 in savings!  That’s a considerable chunk of change to help them retire.

With a little diligence, investing in your child’s financial future can become as instinctual as nurturing their physical health and educational excellence.  At SunMark, we have the tools that can help guide you along the way.  A Personal Banker can assist you or your child in setting up a savings account. Call a branch today!