Preparing Children for their Financial Future

Preparing children for their financial future is a key concern of many parents. A a follow-up to last month’s contribution focused on financial considerations for those between 15-24 years old, we wanted to continue that theme but focusing on what parents can do for their children who are even younger.

Paying Allowance:

Determining How Much

Before determining how much to pay, it’s worth coming up with a plan for how the money is earned in order to manage your child’s expectations.

While using a paid chore system can teach kids responsibility and the value of earning money from doing work (i.e. $7 for mowing the lawn), some families may view chores as a communal effort that are shared among all members of the household.

Either way, when it comes to determining how much weekly allowance to pay, it’s really up to you. However, it’s not uncommon to pay somewhere in the range of $1-$2 for each year of the child’s age. So, by this measure, a 12-year-old would get an allowance ranging somewhere between $12 to $24 per week. For reference, according to RoosterMoney, the average weekly allowance that parents pay is $19.30.

For a teenager, if encouraging them to buy their own clothes and pay for most of their own activities, a weekly allowance could certainly be in the range of $25 per week or more.

Be consistent

Regardless of whether allowance is tied to chores or not, many experts recommend making at least a portion of a child’s allowance fixed (regardless of their chore completion or behavior) and paying it consistently on the same set date – whether weekly, biweekly, or monthly.

Avoid the temptation of caving in and paying allowance early as allowance is supposed to teach kids good saving/spending habits. These lessons are hard but better to learn when young than to become a future payday loan borrower!

Help them set goals

As parents, we play a major role in helping our children learn self-control and the value of delayed gratification (some may be familiar with the Stanford Marshmallow Test).

By giving our children more agency in the spending/saving of their money they can learn the value of skipping short-term wants in exchange for longer-term goals.

One way to structure this could be to require kids to put a portion of their allowance into long-term savings/goals, a portion toward a charity/cause they care about, and to keep the remaining available for immediate spending.

Banking + debit cards

Opening a high yield savings account for your child’s “longer-term savings” – and/or setting up a separate savings account for any specific goals they might have – is a great way to introduce them to online banking and showing them the interest (however miniscule) that accumulates.

Additionally, some parents preparing their children for their financial future will appreciate the prepaid debit cards and online platforms that help make managing allowances a bit easier. Some options include GreenlightCopper, and GoHenry.

Protecting their identity/credit:

Freeze your child’s credit

While preparing your children for their financial future, ensure that their finances don’t get derailed by no fault of their own. By freezing your child’s credit you prevent criminals from opening lines of credit using your child’s personal data (which can be a maddingly laborious process to unwind). Each of the three credit bureaus will require copies of the following:

  • Parent’s driver’s license / government ID
  • Parent’s birth certificate
  • Parent’s Social Security card
  • Child’s birth certificate
  • Child’s Social Security card
  • A utility bill or bank insurance statement with parent’s name/address on it

Note that all three credit bureaus have different forms to process credit freezes for a minor. Equifax has this form, TransUnion has this form, and Experian has this online form that prints to PDF (select “add or remove a security freeze for a minor”).

Protect Social Security numbers

Whenever prompted to provide your child’s SSN, leave this field blank unless you are explicitly required to provide it and understand a) why it’s necessary and b) how it will be protected.

Pay attention to mail

Credit preapproval offers in your child’s name are always worth investigating. Receiving any correspondence from a collection agency addressed to your child is a major red flag.

Keep your child’s documents locked away

Important documents like birth certificates and Social Security cards should be stored in a home fireproof safe – never in your purse, wallet, or car.

Monitor health insurance claim information

A health insurance claim that lists your child’s name but never actually happened can indicate that your child’s personal information has been used to access health insurance benefits.

Investing

For Education: 529 Accounts

When it comes to your children’s education saving, 529s are a reliable, tax-advantaged saving vehicles. From a tax standpoint, 529s grow tax-deferred and withdrawals are tax-free so long as they’re used for qualified education expenses.

While originally limited to post-secondary education costs, you can now take tax-free withdrawals from 529s to pay for apprenticeship programs as well as up to $10,000 per year of K-12 private education.

When it comes to choosing a 529 plan, it’s good to know whether your state offers a state tax deduction for 529 contributions. If so, there may be benefits to using one of your state’s designated 529 plans. However, if your state does not offer a tax deduction for 529 contributions, feel free to use any 529 plan but consider plans like My529 that are affordable and provide access to low-fee, quality index funds (both Vanguard and Dimensional Funds).

For Long-term Growth: UTMAs/UGMAs and Roth IRAs

UTMAs/UGMAs:

These are custodial brokerage accounts that parents can set up for their minor children. Deciding which to open can depend on the state you live in but both are great accounts to begin improving your child’s financial/investment literacy while also saving and investing for the future. Parents commonly use these accounts to give their children a head start in saving for a wedding, a down payment on their first home, or to just get a base of money to begin compounding for the long-term.

Parents should be aware that while they may be the ones funding these accounts, the transfers into the accounts are irrevocable – that is, the money becomes official property of the minor once transferred-in. Upon the minor turning 18 (or 21 in some states), they will reach the age of majority and be able to use the funds at their discretion.

One planning opportunity for parents with low basis stock positions is to “gift” the low basis shares to the minor child’s UTMA/UGMA. In doing this – and beware of the many variables that can change the mechanics of this [CONSULT WITH YOUR TAX ADVISOR] there can be opportunities to sell the position in the minor’s account, thus recognizing the gain at the minor’s lower/nonexistent capital gains rate.

Roth IRAs:

For children that have earned income but are still in the lowest tax brackets, contributing to a Roth IRA sets the table for potentially decades of tax-free compounding.

For parents that are also business owners, it may behoove them to put children on payroll, assuming there is a real business need and that the pay is commensurate with the work/time.

Parents that can hire their children are able to a) lower their reported income (thereby reducing self-employment/income taxes) and b) provide the child with “earned income” which can go towards their annual Roth IRA contribution. Again – consult with your tax advisor!

DISCLAIMER TO PARENTS Get Your Own Sh*t In Order, FIRST!

As much as we love our children, we mustn’t forget to put our own oxygen masks on first.

Emergency Fund

Having a child naturally increases the odds of having some unplanned expenses. Additionally, the mere fact that you’re now financially responsible for someone beyond yourself raises the stakes for “rainy day” planning. As such, having an emergency war chest to keep things running smoothly in the event of job loss, illness, or a large unexpected expense is crucial.

Generally, when it comes to emergency funds, we suggest keeping three to six months’ worth of essential living expenses readily available in a high yield savings account (Marcus, AMEX, and CapitalOne all offer competitive APYs).

Education Planning vs. Retirement

If you’re torn on whether to invest for your child’s college or your own retirement, more often than not: choose retirement. Children can borrow money to get a college education, you cannot borrow to fund your retirement.

We all want to provide our children with the best education money can buy, but be wary of placing too much investment in this area if it means you’ll be neglecting your own future (in which case you’ll be the financial burden to them later on!).

With college education costs continuing to outpace inflation, it behooves nearly all parents to consider meeting with a college planning expert to navigate the nuances so that parents (and their children!) can get the most for their money.

Insurance:

Health Insurance: 

Be aware of your plan’s family deductibles (especially if in a high deductible health plan [HDHP]) so that hospital bills don’t leave you in a financial bind.

Life Insurance: 

Having a sufficient amount of term life insurance can go a long way in helping a family stay afloat if one parent dies while the children are still too young to provide for themselves. Life insurance death benefits are tax-free and can create breathing room for a widow(er) to figure out the best next steps for the family. This could include taking unpaid time away from work, paying off the mortgage, funding the kids’ tuition/childcare, or any other obligation that the deceased spouse can no longer help with.

Disability Insurance:

While parents may have employer-provided disability insurance, we recommend making sure that it’s sufficient coverage to pay for essential expenses like your mortgage, debt, childcare, and household expenses. Separately, it is always worth considering getting a private/individual policy to supplement any existing coverage that is customized to your needs and “portable” should you leave your current employer. Keep in mind that some policies may pay benefits only if you can’t perform any work at all. If you have a high paying job that requires specific skills, consider an “own occupation” policy.

Maximize Available Tax Credits:

Unlike the Child Tax Credit (CTC) which is picked up on nearly all tax planning software, the Child and Dependent Care Tax Credit is one that is regularly missed as it requires parents to report care expenses. Most parents that pay for childcare while working (or looking for work) can claim this credit.

To qualify, children must be under the age of 13 and parents must report expenses paid for babysitting, daycare, preschool, summer camps, and even nannying arrangements.

Families are eligible to receive up to $8,000 in credits depending on the number of children and household adjusted gross income (AGI). Be aware, parents are required to provide their caregiver’s name, tax identification information (i.e. Tax ID or SSN), and the amount of expenses.

Estate Planning

When it comes to drafting a will, one of the most important parts is selecting who you would like to serve as guardian to your children. Have a conversation with an attorney to make sure other parts of your estate plan are in order (powers of attorney for financial and health care decisions) and be sure to keep beneficiary designations up to date (note: beneficiary designations supersede your will!). Your attorney can help you determine if setting up a trust makes sense for your situation and goals.

Final Thoughts

The last thing we will ever attempt to do is tell someone how to raise their children. We know our lane and parenting advice is not it. Ultimately, though, all parents want the best for their children – kids that are confident, kind, and successful.

When it comes to parenting – regardless of the topic – a common refrain suggests that it’s most important to model the behavior you want your child to exhibit. Preparing children for their financial future begins with you, the parent. By getting your own financial affairs in order, you can speak more confidently/transparently about household finances and raise financially intelligent children that feel empowered to take on the world.

With the cost of raising a child from 0-18 continuing to climb (now up to over $300k), the fewer missteps the better.

Preparing Young Adults for their Financial Future

With back-to-school right around the corner, we wanted to use this blog to address preparing young adults for their financial future. particularly those between the ages of 15-24. While some of these topics are especially important for young people, many are relevant for all ages.

Budgeting

There is a common misconception that “budgeting” is restrictive – that one must eliminate life’s pleasures – trading a night out with friends for a single serving of Cup Noodles ramen at home. Not so.

Rather, having a budget simply means that you’re thinking about money decisions before making them. The idea is to become more intentional with your spending so that you’re not forced to stay home, alone, eating Cup Noodles simply due to short-sighted planning.

So, in the same way that a recent college entrant has to learn about balancing their classes, homework, study hours, extracurriculars, and social life, they also need to learn how to prioritize their financial wants vs. needs.

Not having experience managing month-to-month living expenses is no excuse for unconsciously blowing through funds – whether their own funds, loaned funds, or the supplemental money provided by the bank of mom & dad.

Budget Practice for Young People

One way for our children to manage their wants vs. needs as it relates to finances is to give them a sense of agency and personal responsibility in how funds are spent.

High Schoolers

When it comes to back-to-school shopping, consider giving your high schooler a budget to spend on new clothes, shoes, backpacks, and other discretionary items they may need. If you’re feeling generous you can even let them know that whatever they don’t spend, they can keep.

“Want those new Jordan’s? Have at it! But don’t complain when you’re remaining funds only afford you a pair of shorts and a t-shirt!”

Those $60 Vans almost immediately begin looking more appealing.

College-aged Kids

For parents providing their college-aged kids with supplemental funds, consider setting parameters around monthly living expenses.

Always re-funding their checking account and/or paying off the credit card bill in full each month is unlikely to instill personal responsibility as it relates to finances.

Instead, consider setting a monthly amount that you’ll contribute to their debit account. If you’re child exceeds that and there’s still five days left in the month they’ll either learn to love those Cup Noodles or they’ll adapt… or they’ll get frustrated and tell you you’re a bad parent.

In any case – they’re learning through living.

Big Ticket Expenses

Inevitably, there will be cases when your child asks for your support for bigger ticket expenses.

Examples: a spring break trip, studying abroad, or purchasing a car.

Does your child need to fund any one of these fully through their summer job, work-study, or internship? As parents, that’s your call. It’s likely that many parents reading this either self-funded these things or skipped out on them because both parental support and personal funds were lacking.

However, for parents that are lending financial support to children, getting your child to contribute towards the larger goal – perhaps a defined percentage or an agreed upon amount – is a great way for them to have skin in the game.

Developing a Good Credit History

Building good credit history is an important task. In an increasingly cashless society, creating a track record that shows you are a reliable borrower is a major step in the right direction towards financial independence. The sooner one begins, the better.

Secured Credit Cards

Getting a credit card can be a challenge for those without a credit history. This is where secured credit cards come in. Children over the age of 18 can qualify, regardless of income.

REASON: A secured credit card requires putting down a security deposit (think: collateral) that acts as the card’s credit limit. It’s kind of like your little one riding with training wheels again… but it builds their credit history.

We found Bankrate’s list of secured credit cards helpful to sort through the variety of options.

Do note that secured credit cards are not the only way for a young person to get access to a card that builds their credit history – they can also be added as an authorized user on a family member’s credit card.

Establishing good credit at a young age can open up opportunities down the road and credit scores can impact all of the following:

  •  Leasing an apartment
  • Setting up utilities
  • Applying for a job
  • Buying or leasing a car
  • Purchasing a cell phone plan
  • Interest rates for credit cards and various loans

Additionally – there are some basic rules of thumb to ensure that credit is being used appropriately and improving a new borrower’s credit score:

  • Set up automatic payments (to ensure no missed payments)
  • Keep credit utilization below 30% credit utilization (i.e. staying below 30% of total credit limit)
  • Pay off your balances in full when due (i.e. not paying off immediately after each transaction)
  • Make student loan payments on time

DID YOU KNOW: Your three free credit reports can be accessed directly from annualcreditreport.com – the only source for free credit reports as authorized by Federal law.

Other important financial know-hows for young adults:

Knowing How a Bank Account Works

Do they understand:

  • minimum balance requirements?
  • overdraft and service fees and how to avoid them?
  • how long it can take to transfer funds between different accounts and institutions?

Being Smart About Cybersecurity

Many students use shared Wi-Fi networks that are not secure – are they aware of this?
Consider investing in a Virtual Private Network (VPN) to establish a secure, encrypted connection between your child’s computer and the internet.

Renting Textbooks

No need to buy new if you can rent or buy used.

Student Loans & Delayed Gratification

For those that take out student loans, it’s not uncommon to have some extra funds available after tuition/room/board fees are paid.

No – these funds are not fun money. Student loan borrowers should be reminded that the longer these surplus loan funds can be stretched, the less they’ll need to fork over for monthly repayment when they begin working.

Long-term Investing

Children with on-the-books earned income are also likely to be in a low (or zero %) tax bracket. This presents a great opportunity to open and fund the golden egg of their future financial plan: a Roth IRA.

Final Thoughts:

Discussing household finances is, unfortunately, a taboo subject in many families. However, the more proactive we can be in preparing young adults for their financial future the better we can equip them with information to help them avoid common pitfalls and succeed.

So – please – think about those young adults (or soon-to-be young adults) in your life and share what you can. Each of us stands on the shoulders of those before us. Even if you don’t feel that your lived experience is worth sharing, it’s highly likely that a young person could glean gems of wisdom from both your financial successes and your defeats.

Parents: Also be aware of recent FAFSA updates and the pros and cons of cosigning a student loan.

CLIENTS: We are offering an on-demand financial literacy course that your children have access to for FREE. This is not only a great educational opportunity for them, but also something they can leverage on their resume or school application.

Please be in touch if this might be of interest.

This One Change to Financial Aid Could Negatively Impact Many Families

Apple on Book

At the end of 2020, Congress passed the Consolidated Appropriations Act. Most of the attention around this act, a $2.3 trillion spending bill, was focused on the COVID-19 relief provisions. However, also buried in that massive document were dramatic changes to student financial aid rules.  These changes will go into effect during the 2023-2024 school year when the FAFSA becomes available on October 1, 2022.  Some of these changes are long overdue and will be a benefit to families.  However, not all changes will be beneficial.

First, here is a brief rundown on some of the changes you can expect in the future: 

The FAFSA will be shorter and easier to fill out

The FAFSA currently has over 100 questions included in the application and many of them are confusing.  The new simplified version will have approximately 36 questions.  It also allows applicants to have both their taxed and untaxed income transferred to the FAFSA automatically, as opposed to manually entering it or having to self-report it.

“Expected Family Contribution” will be renamed “Student Aid Index”

The Expected Family Contribution, or EFC, is an index that schools use to determine a family’s eligibility for financial aid.  The formula includes such things as a family’s income, non-retirement assets, marital status, number of dependents, and how many children will be attending college at the same time.  Theoretically, the lower the EFC, the more aid could be available to a family.  This will get renamed to Student Aid Index, or SAI, but will operate similar to the EFC so there will be no impact to families financially.

Change in Custodial Parent

Under the current rules, the custodial parent in two household families (as a result of divorce or separation for instance) is the parent whose financial information is supplied.  The custodial parent is defined as the parent with whom the child lives with for the majority of the year.  As of 2022, the parent who supplies the most financial support will be required to fill out the FAFSA application, and this may not necessarily be the custodial parent.  The result – a higher EFC and less financial aid available to the family.

Pell Grant Eligibility

Pell Grants are a form of need-based financial aid that are awarded to low-income students to help offset college costs.  These typically do not need to be repaid.  This change is one of the positives of the new legislation. Under the current method, Pell eligibility is determined by a family’s EFC, the cost of attendance at the chosen school, and whether the enrollment status is part time or full time.  With the new rules, the size of the student’s family and their adjusted gross income will determine their Pell eligibility and size of the award.  Families that make less than the 175% federal poverty level will receive the maximum award, which is $6,495.

The above summarizes some of the changes you can expect to see in the 2023-24 school year. Now let’s focus on one that will negatively impact many families.  Currently, financial aid eligibility increases for families with more than one student enrolled in college at the same time.  Under the new law, the aid eligible to families will significantly decrease.

Let me explain with a fictitious family that includes two children who are two years apart. The first child will be in college by himself for his freshman and sophomore year, but the younger child will start college when the older one begins his junior year.  Therefore, the family will have two kids in college at the same time for two years. Both parents work and their combined income is $150,000.  The family also has assets of $150,000 which include cash and savings, taxable investment assets, and 529 plans.   The calculated expected family contribution (EFC) for this family is $40,000.

Before we dive deeper into the above family’s college financial situation, I would like to explain how the EFC is utilized by schools.  Your EFC is an indexed number that college financial aid offices use to determine how much financial aid a family is eligible for.  The formula for financial need is the Cost of Attendance (COA) less the Expected Family Contribution (EFC).  For example, if your EFC is $30,000 and you are applying to a school that costs $70,000, you will be eligible for $40,000 of need based aid.  ($70,000 COA – $30,000 EFC = $40,000 need).  It is important to point out – just because you are eligible for $40,000 in need-based aid, it does not mean you will receive this from the school your child applied to.  All schools vary in the determination of financial aid, so this will be solely dependent on the individual institution.

Now back to our fictitious family.  Under current guidelines with two students in college at the same time, this family’s EFC would be cut roughly in half for each student.  When this family has only one child in college for the first two years, the EFC that the college will use is $40,000.  However, once the second child starts school, the EFC will be roughly be cut in half to $20,000 per student.  The total EFC does not change, but the distribution of it does.  Therefore, the school that the older child attends will factor in the following EFC numbers for the four years he/she is in college as $40,000, $40,000, $20,000 and $20,000 and adjust the need based financial aid package accordingly, with more aid from the school being distributed in the last two years.  End result: the family is still expected to pay a total of $40,000 annually.

Under the new bill, the EFC no longer will be reduced with multiple kids in college at the same time.  Therefore, the above family’s EFC contribution would be $40,000 in year one and two for the oldest child and then $40,000 per child for the next two years.  That reduction is eliminated and so is the additional need-based aid that would come with it.  This will significantly increase the financial strain on families with two children attending college simultaneously.

The Expected Family Contribution index was designed to give insight to colleges on what a family could afford to pay each year. For families who have, or will have, multiple children attending college at the same time, this new rule is a major setback. Instead of being more accommodating to families facing the rising cost of college, this new rule essentially doubles a family’s expected contribution, which would decrease the amount of aid they’re eligible for.  We encourage all families who will be adversely impacted by this change to consider writing your Congressman or Congresswoman and requesting action to repeal this part of the bill.