As a parent, there's no end to the important lessons you want to instill in your kids. You try to teach them about life and give them the skills they'll eventually need to be independent adults. It's easy when they're young. You teach them to look both ways before crossing the street and to study hard. But as they become teenagers, the issues can become more challenging: The birds and the bees is a topic that comes to mind, or the dangers of drugs and alcohol.
But right up there in difficulty level is talking about money. In fact, a survey of parents sponsored by Schwab revealed that most parents feel more comfortable having the sex talk than they do discussing finances. To my mind, money - and how to manage it - is one of the most important talks you can have with your child. And the sooner you have it, and the more open you are about managing money, the more prepared your child will be when starting to build wealth when he or she becomes an independent, working adult.
SAVING IS WHERE IT ALL BEGINS
When I say "wealth," I'm not talking about motivating your children to become rich. I'm referring to teaching them to take full advantage of one of the most powerful financial opportunities they'll encounter when they enter the working world: company-sponsored retirement plans like 401(k) and 403(b) plans and their cousins: IRAs.
I've talked about it often enough. If you can introduce the value of saving early and regularly for their futures, you'll be giving your children the foundation that will help them along every stage of life. It will be a natural next step for them to start saving and investing for their long-term future; they'll find the benefit of using tax-advantaged plans. Give your kids a leg up by discussing the basics about retirement planning. The vast majority of kids don't even know what a 401(k) is, and most children - most adults, for that matter - would rather spend today than save for tomorrow.
THE VALUE OF INVESTING AT EVERY AGE
It may seem daunting to break the fiscal ice with a young person and start talking about building wealth, but you can never start instructing the basic principles too soon. Paying for an education, buying a house or even raising a child are all important and expensive goals for many people. Yet even more expensive, and often overlooked by young people, is retirement. You have a hand in prepping your kids to confidently tackle each of these.
You may chuckle at the idea of talking to a teenager about retirement when all they seem to talk (or text) about is getting a driver's license or finding a date to the prom; however, retirement is the biggest financial challenge your kids will have to face. The next generation, in particular, will probably carry much of the burden themselves.
But that's where you come in. You're the best money coach for any child in your life, and your lesson book is your own experience. You don't need a few extra letters after your name to caution against the pitfalls of mismanaged credit or to extol the value of saving versus spending. Speak about your own experiences of managing or mismanaging your money.
KEEP TIME ON THEIR SIDE
Obviously, there's a lot to explain when it comes to investing, from the various investment opportunities - stocks, bonds, mutual funds, certificates-of-deposit - to ideas like asset allocation, diversification and risk tolerance. It's confusing for many adults, much less teens. As a first step, I urge you to explain to your kids that they possess an incredibly valuable and easy-to-use asset: time.
Here's an example: If your 18-year-old daughter could invest $1,000 a year in a traditional IRA (in which taxes are deferred until withdrawal), and she earns an average annual return of 8 percent, her retirement account would be worth more than $328,000 by the time she turned 60. That's with $42,000 down. Now that's a pretty dramatic demonstration of the power of compounding growth, and a good reason to start early.
The outcome is even better for some 401(k) plans when you consider that many companies offer a "match." Let's say your 22-year-old son is about to start his first job, which pays a salary of $30,000 a year. The company offers a 401(k) plan that enables him to save, pretax, a percentage of his income (the federal ceiling for 2008 is $15,500) and will match up to 5 percent of his savings at the rate of $.50 on the dollar. Say he is willing to divert 5 percent of pretax income into the 401(k) to get the full company match.
The math works like this: 5 percent of $30,000 is $1,500 per year. His employer matches that with another $750 (50 percent of $1,500), so his annual investment totals $2,250. That's a good start made even better by the fact that the investment is tax-deferred, which at a 15 percent marginal rate, could make the net cost of the investment just $1,275.
IT'S UP TO YOU
If your head is spinning, don't worry. The important thing is to know the advantages of tax-deferred accounts and the benefits of starting early. It's never too soon to get your kids started thinking about the future.
It can be hard, sometimes, to imagine a teenager actually listening to your advice; however, believe it or not, your kids want to know. When it comes to the challenge and the opportunity of building wealth, you can have a huge impact on your children's future. Sit them down and see how easy it can be to have such a difficult talk.