Finances For Kids: Fiduciary Lessons for Tomorrow's Investors

Whether you begin to incorporate lessons while they are learning to read, or decide that it is time to have a talk while they are in high school, it is never too early to begin teaching children about the value of saving money!

As parents, your behavior and speak has a magnificent influence on your child's teachings, and keep in mind that lessons of budgeting, saving, and investing are not always taught in schools. Therefore, it is a great idea to bring attention to the subject at home during life's routine activities

Lessons at Home for Your Children . . .

For youngsters, learning to read is a very exciting time! For parents, this is a great place to begin incorporating some very basic financial concepts like the importance of saving. There are plenty of children's books written to incorporate financial lessons within the story line, so be sure to seek out those books when shopping for reading material.

Also, piggy banks have evolved and are a great tool to get your kids to learn about the concept of budgeting. Nowadays, piggy banks are available with color-coded compartments that provide your child the choice to allocate money to categories, such as save, spend, invest, and donate. In the same way that children watch parents behave (saving money in an emergency fund, spending money on food and clothing, investing money in a retirement plan, and donating to charitable/educational institutions), children may also do so on their own level. This serves as valuable practice for young ones to make allocation decisions, which in adult life, we do so every day.

As children grow older, they sometimes strive to be quite independent, which can also be nerve-wracking for parents! Below are a couple of examples of effective ways to give your teen financial responsibility and independence, while teaching them in a context that they may relate to more easily.

Example: Budgeting may be a difficult concept for teenagers to grasp when they are supposed to focus on school and are not concerned with providing an income and paying bills for a household. One way to teach them the concept of budgeting in a way that they may relate to quite well is to give them a clothing budget on an annual basis.

Each year your teenager would start with a check register with a beginning balance that you as parents agree upon beforehand. Whenever they believe that they "need" anything clothing-related (everyday wear, shoes, coats, swimsuits, dresses or suits for special occasions, exercise clothing, etc.), they can shop accordingly and deduct the amount in the register as they go along.

You can accompany them on shopping outings and pay for the items, while they deduct the amount in the register (never physically handing them the cash). Furthermore, if you become comfortable and confident in their abilities, then after the first year or two, you can decide to give them a debit card with a fixed amount to use so that they can handle this task on their own. If they do not spend the money, then it accrues and may be reallocated to other uses, such as treating themselves to a non-clothing item.

A most realistic way to enforce this lesson would be to make available for use a fixed dollar amount on a monthly basis. This means that after deciding the yearly amount allocated to your teenager's clothing expenses, only enable them the use of one-twelfth of it each month. This mimics real life more realistically, as most people do not have large lump sums available at their disposal, and instead depend on a monthly income to pay bills accordingly.

Example: It is of great help in the future if one begins building a record of good credit as early as possible. But the prospect of giving an 18-year-old his or her own credit card without prior financial lessons or experience is a scary one!

In an effort to prepare your child for the use and management of a credit card, you could open a minor's saving, checking, debit card, and/or investment account for your child with you as the custodian. Working alongside your child to balance a check register will reinforce basic budgeting tenants, such as that you should not spend more than you can afford and to always save a portion of any allowance or earned money. A starting point could institute the rule that 30 percent of any income should go into a savings account for emergency purposes only, while the remaining 70 percent is allocated to other needs or wants.

How to Save Money for Your Children . . .

Education: An excellent way to save money for educational purposes on a tax-deferred basis (as long as the money is withdrawn and used for approved educational expenses) is to open a 529 plan. Each state and Washington, DC has its own program that may offer a certain incentive for residents to utilize its program instead of another. Therefore, our advisors always consider that option first, as some incentives include a state income tax deduction. Depending on your individual scenario, the extra incentive may or may not be of importance.

Regardless of whether you move to another state, 529 plans are recognized as tax-advantaged educational savings plans by the U.S. federal government. Therefore, moving across state lines would not affect your savings in this account; however, our advisors would research your new state of residence and advise accordingly in terms of rolling your existing 529 account into a new one if it appears that there is justification to change to your new state's plan due to the extra benefit of being a resident.

A general overview of 529 plans is given on the SEC website.

Uniform Transfer/Gift to Minors Act: UTMA/UGMA accounts are traditionally established as a way to gift cash and/or securities to a minor without the use of a formal trust. The account is controlled by the custodian until the minor attains an age of majority. The applicable age of majority ranges from 18 to 21, depending on the state in which the owner resides.

Distributions from UTMA/UGMA accounts are not limited to qualified education expenses. But any money that is withdrawn must be for the beneficiary’s benefit. Nothing prevents the custodian from spending the money for the benefit of the child, so long as the expenses are not "parental obligations" or otherwise for the benefit of the custodian. Parental obligations are expenses a parent is normally expected to provide for his or her child, such as food, clothing, and shelter.

When you provide your child with an understanding of these basic yet vastly important concepts, you will also provide yourself with the secure feeling that your children will be more likely to successfully manage future financial responsibilities as an adult. Please feel free to contact our advisors with any questions relating to saving for children, as we are happy to help!