Q: What is the best financial step parents should take to help their kids financially? A: Start early. Ask any first-year financial planning student what is the most important ingredient to building a secure retirement and they will answer, – “Time.”
The earlier you start saving and planning, the better your chances of reaching your goals. With Social Security already running huge deficits and companies dumping their pension plans as soon as they can, personal savings may be the only way our children will be able to retire. Parents can help their kids safeguard their retirement by putting the powerful force of compound interest to work for them as soon as possible.
One of the most important things to teach your child is the value of savings. Parents should start saving for them until they begin earning their own money. Then they should insist on having them save something from every dollar they earn. By the time they are out on their own, they should have learned this important habit. Too many people grew up without any financial guidance. They never learn to save and instead used credit cards to get the things they wanted. They never learned to budget and so they spent more than they earned.
Living on credit instead of disciplining yourself to save for purchases creates a financial house of cards. We were recently reminded of risky it is to live a lifestyle based on credit. The economic downturn of 2008 caused many people to lose their homes because they bought more house then they could really afford. This generation of kids can learn from those mistakes. Parents should teach their children how to save and help them get started so they can build a nest egg worth millions instead of thousands.” Here are some ways to get your kids started:
• Start at birth – Just $100 per month growing at 8% from birth will accumulate to $48,000 by the time the child reaches age 18. If they never save another penny from that time on, the $48,000 will grow to $1.7 million when they reach age 65.
• Pay yourself first – A minimum goal should be to save 10 percent of every dollar earned, from their first lawn mowing job on. Parents should insist on saving before spending.
• Save tax efficiently — Ideally, you should save in a Roth IRA account at the beginning of your career. When you reach your peak earnings (usually around age 40), switch to a tax-deferred account like a 401(k).
• Parents, control your spending – Most parents today spend too much on gift giving. Start by taking half of what you have been spending on gifts (toys, games, etc.) and invest it in a mutual fund for your child.
• Gift registry – It is fairly common to get invited to a birthday or wedding and find the honoree has set up a gift registry at a store. Why not do the same thing with a mutual fund for your child? Encourage friends and relatives to contribute to the mutual fund account you’ve started instead of buying gifts for birthdays and holidays.
• The habit is more important than the amount – Contributing small amounts on a regular basis is a better strategy than waiting to accumulate a larger sum. Get in the habit of saving something regularly.
• Let the Government help – the child tax credit is still $1,000 per child until they reach age 17. (Under current law the credit will be reduced after December 31, 2012.) Discipline yourself to save the credit when it is returned to you as a refund. It doesn’t take a lot to give your kids long-term security when you start early. Let the magic of compounded interest do most of the heavy lifting. Start early and save often.
Rick Rodgers, CFP®, is President of Rodgers & Associates in Lancaster, PA and author of “The New Three-Legged Stool™ A Tax Efficient Approach to Retirement.”