Preparing our Kids for Financial Success

September 13, 2016

Start Early

The earlier children are introduced to financial fundamentals, the more likely they are to be financially responsible young adults. Financial literacy is more important than ever given the direct access to capital markets, online banking activity, lending options available, and spending decisions promulgated through social media. There are many ways to introduce children to the world of money and banking. The best approaches allow kids to practice making money decisions. With each gift, each paycheck earned, a portion should go into savings, an allocation to giving considered, and the recognition that a dollar spent is gone forever. These lessons can be instilled at a very young age. Contributing to PAWS, for example, is charitable giving in action.

Prologue to success

Start a child off on the path to financial prosperity by opening a savings account at a local bank where one walks into a branch to make a deposit by filling out a deposit slip and handing the cash or check to a teller. As deposits are made, consistently review account statements or online balances. Set savings goals. Teach the principle of delayed gratification by saving to purchase an item that is highly desired. Talk about wants vs. needs, the utility of an item, the expected longevity. Assign a value to tangible things. Communicate what things cost- not just the cost of toys and electronics, but the cost of groceries, cell phone plans and electricity, even the cost of services such as camps and lessons. Make money real. I recommend that kids have a debit card in high school that allows for limited access to only the amount of funds that are available. Dolling out a credit card for routine purchases is not a good idea. It teaches kids the false premise that access to money is instantly accessible and limitless.

Building creditworthiness

Upon reaching age 18 and having earned income is the appropriate time for a young adult to apply for credit in their own name. The credit limit may start at $300 or $1,500. This is when the real learning begins. How credit is managed will be a significant factor in determining their credit score- a number assigned to a person that indicates to lenders their ability to repay credit that is extended. Making payments on time, for the full balance, (not the minimum amount due) and under-utilizing the amount of credit available, will all contribute to building a “good” credit score over time. At the time they rent their first apartment, signing their name to the lease after a background check has been completed, or purchase their first car, they will thank you for teaching them how to build credit worthiness.

Paid work means paying income taxes

Seeking a first job is very exciting. For students, the thought of being paid to work sounds like a good deal. In actuality, “a real job” is beginning of a lifetime of learning economics. The amount one is paid is determined by supply and demand, the type of work being done, and the amount of skill or experience needed. The government sets minimum wage requirements. In San Diego the current minimum is $10.50 an hour, increasing to 11.50 on 01/01/17, gradually increasing to $15 an hour in 2022. The biggest surprise anyone has when they take a new job is how much is taken out in taxes. Social Security and Medicare taxes will claim 7.65%, often referred to as FICA taxes. An IRS form W-4 will need to be completed and a single person typically can claim either one or zero exemptions, depending if they will file an income tax return on their own or be claimed as a dependent by their parents. In the U.S., we have a progressive income tax system, where tax rates change by bracket. Expect to begin paying 10% in federal taxes at the first bracket and to pay California state income taxes on top of that. So what a wage earner actually takes home is often much less then what they anticipated. Budgeting comes into play, and learning to do more with less. Most important though, is to save. Save something. Save with the very first paycheck. It is concept of paying yourself first.

Putting money to work

In the next issue, we’ll talk about how to make your money work as hard as you do. There is earned income and unearned income. Unearned income needs to be managed to earn a return and to be tax efficient. Do you invest it, spend it, loan it to someone else, or give it away? We’ll discuss those decisions next time.